•limitations on insurance coverage, such as war risk coverage, in certain areas,
•imposition of trade barriers,
•wage and price controls,
•import-export quotas,
•exchange restrictions,
•currency fluctuations,
•changes in monetary policies,
•uncertainty or instability resulting from hostilities or other crises in the Middle East, West Africa, Latin America or other geographic areas in which we operate,
•changes in the manner or rate of taxation,
•limitations on our ability to recover amounts due,
•increased risk of government and vendor/supplier corruption,
•increased local content requirements,
•the occurrence or threat of epidemic or pandemic diseases and any government response to such occurrence or threat,
•changes in political conditions, and
•other forms of government regulation and economic conditions that are beyond our control.
See "Item 1A. Risk Factors - Our non-U.S. operations involve additional risks not associated with U.S. operations."
Executive Officers
Officers generally serve for a one-year term or until successors are elected and qualified to serve. The table below sets forth certain information regarding our executive officers as of February 22, 2021:2024:
| | | | | | | | | | | | | | |
Name | | Age | | Position |
Thomas BurkeAnton Dibowitz | | 5352 | | President and Chief Executive Officer |
Jonathan BakshtChristopher Weber | | 4651 | | ExecutiveSenior Vice President and Chief Financial Officer |
Gilles Luca | | 4952 | | Senior Vice President -and Chief Operating Officer |
Alan QuinteroMatthew Lyne | | 5749 | | Senior Vice President - Business Developmentand Chief Commercial Officer |
Michael T. McGuintyDavor Vukadin | | 5850 | | Senior Vice President -and General Counsel and Secretary |
Set forth below is certain additional information on our executive officers, including the business experience of each executive officer for at least the last five years:
Thomas BurkeAnton Dibowitz became the President and Chief Executive Officer of Valaris and a member ofin December 2021, following his service as the Board of Directors in April 2019 in connection with the Rowan Transaction. Previously, he served as Rowan’sCompany’s interim President and Chief Executive Officer since September 2021. Mr. Dibowitz joined the Valaris board of directors in July 2021. Prior to joining the Valaris board of directors, he served as well asan advisor of Seadrill Ltd., a director since April 2014.global offshore drilling contractor, from November 2020 until March 2021. He served as Rowan’s Chief Operating Officer beginning in July 2011 and was appointed President in March 2013. Mr. Burke first joined Rowan in December 2009, serving as Chief Executive Officer andof Seadrill Ltd. from July 2017 until October 2020. Prior to this Mr. Dibowitz served as Executive Vice President of LeTourneau Technologies until the saleSeadrill Management since June 2016, and as Chief Commercial Officer since January 2013. He has over 20 years of LeTourneau in June 2011. From 2006drilling industry experience. Prior to 2009,joining Seadrill, Mr. Burke wasDibowitz held various positions within tax, process reengineering and marketing at Transocean Ltd. and Ernst & Young LLP. He is a Division President at Complete Production Services, an oilfield services company,Certified Public Accountant and from 2004 to 2006, served as its Vice President for Corporate Development. Mr. Burke received his PhD in Engineering from Trinity College ata graduate of the University of Oxford, a Bachelor of Science in Engineering with Honors from Heriot-Watt University in Scotland, and an MBA from Harvard Business School,Texas at Austin where he was awardedreceived a Baker Scholarship.Bachelor's degree in Business Administration and Master's degrees in Professional Accounting (MPA) and Business Administration (MBA).
Jonathan BakshtChristopher Weber became Executivethe Senior Vice President and Chief Financial Officer of Valaris in August 2022. Previously, he served as Chief Financial Officer of LUFKIN Industries, a leading global provider of rod lift optimization solutions, products, technologies and services to the oil and gas industry, from February 2021 to July 2022. Mr. Weber has also served as Chief Financial Officer of Abaco Drilling Technologies from July 2019 to February 2021 and Chief Financial Officer of Haliburton Company from June 2017 to November 2018. Prior to Halliburton, Mr. Weber served as Chief Financial Officer of Parker Drilling Company, and held senior finance roles at Valaris predecessor companies, Ensco plc and Pride International, Inc. He received an MBA in Finance and Strategy from the Wharton School and a BA in Economics and English Literature from Vanderbilt.
Gilles Luca became Senior Vice President and Chief Operating Officer in December 2019. Previously, he served as the Company's Senior Vice President, - Chief Financial Officer since November 2015, and as Vice President - Finance and Vice President - Treasurer before his appointment as Chief Financial Officer. Prior to joining ValarisOperations Support. He joined Ensco in August 2013, Mr. Baksht served as a Senior Vice President at Goldman Sachs & Co. within the Investment Banking Division where he served as a financial advisor to energy clients, oilfield services lead and a member of the Merger & Acquisitions Group. Prior to joining Goldman Sachs in 2006, he consulted on strategic initiatives for energy clients at Andersen Consulting. Mr. Baksht holds a Master of Business Administration from the Kellogg School of Management at Northwestern University and a Bachelor of Science with High Honors in Electrical Engineering from the University of Texas at Austin.
Gilles Luca joined Valaris in 1997 and was appointed to his current position of Senior Vice President - Chief Operating Officer in November 2019. Prior to his current position,1997. Mr. Luca also served Ensco as Senior Vice President - Western Hemisphere, Vice President - Business Development and Strategic Planning, Vice President - Brazil Business Unit and General Manager - Europe and Africa. Before joining Ensco as an Operations Engineer in The Netherlands, Mr. Luca was employed by Foramer Drilling and Schlumberger with assignments in France and Venezuela. He holds a Master's Degree in Petroleum Engineering from the French Petroleum Institute and a Bachelor in Civil Engineering from ESTP, Paris.Engineering.
Alan QuinteroMatthew Lyne became the Senior Vice President - Business Developmentand Chief Commercial Officer of Valaris in April 2019 in connection with the Rowan Transaction.September 2022. Previously, he served as Rowan’s Senior Vice President, Business Development since 2018, after joining Rowan as SeniorExecutive Vice President, Chief TechnologyCommercial and Strategy Officer of Seadrill Limited from May 2021 to September 2022. Seadrill Limited filed for bankruptcy in 2017.February 2021. Prior to joining Rowan, Mr. Quintero wasthis role, he held a Partnernumber of senior marketing and commercial roles at Trenegy Incorporated, a management consulting firm, from January 2016 to June 2017, and spentSeadrill Limited for more than 10 years. He also served in a number of senior operational and functional roles with Transocean Ltd. prior to joining Seadrill Limited. Mr. Lyne has over 20 years of offshore drilling experience in various operational and managerial roles for international offshore drilling companies including serving as Senior Vice President, Operations at Transocean.locations. Mr. Quintero receivedLyne has a Bachelor of Science degree in Mechanical Engineering from Texas A&MMontana Technological University. He also received education at Heriot-Watt University, Columbia University, Harvard University and the Wharton School of Business.
Michael T. McGuinty joined Valaris in February 2016 as Senior Vice President - General Counsel and Secretary. Prior to joining Valaris, Mr. McGuinty served as General Counsel and Company Secretary of Abu Dhabi
National Energy Company from January 2014 to December 2015. Previously, Mr. McGuinty spent 18 years with Schlumberger where he held various senior legal management positions in the United States, Europe and the Middle East including Director of Compliance, DeputyDavor Vukadin was appointed Senior Vice President, General Counsel - Corporate and M&ASecretary in May 2022. Before being named to his current position, Mr. Vukadin served as Associate General Counsel and Director of Legal Operations.Secretary from June 2021 to May 2022. Previously, he served as Associate General Counsel and Assistant Secretary from November 2018 to June 2021. He joined Valaris as Senior Counsel in 2014. Prior to Schlumberger,joining Valaris, Mr. McGuintyVukadin practiced corporate and commercialsecurities law in Canada and France. Mr. McGuintywith the law firm of Norton Rose Fulbright for thirteen years. He holds a Bachelor of Laws and BachelorArts degree in Economics from The University of Civil Law from McGill UniversityChicago and a Bachelor of Social Scienceslaw degree from theThe University of Ottawa.Texas School of Law.
EmployeesEmergence from Financial Restructuring
We employed approximately 4,500 personnel worldwide including contract employees,On August 19, 2020 (the “Petition Date”), Valaris plc (“Legacy Valaris” or “Predecessor”) and approximately 3,400 personnel excluding contract employees, ascertain of December 31, 2020. The majorityits direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of our personnel work on rig crews and are compensated on an hourly basis.the Bankruptcy Code in the Bankruptcy Court under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”). On March 3, 2021, the Bankruptcy Court confirmed the Debtors' chapter 11 plan of reorganization.
On April 30, 2021 (the "Effective Date"), we successfully completed our financial restructuring and together with the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we eliminated $7.1 billion of debt and obtained a $520 million capital injection by issuing the first lien secured notes (the "First Lien Notes"). See “Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the First Lien Notes. On the Effective Date, the Legacy Valaris Class A ordinary shares were cancelled and common shares of Valaris with a nominal value of $0.01 per share (the “Common Shares”) were issued. Also, former holders of Legacy Valaris' equity were issued warrants (the "Warrants") to purchase Common Shares. See “Note 9 - Shareholders' Equity" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the issuance of the Common Shares and Warrants.
See“Note 2 – Chapter 11 Proceedings” and "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional details regarding the reorganization, Chapter 11 Cases and related items.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports that we file with, or furnish to, the Securities and Exchange Commission ("SEC") in accordance with the Exchange Act are available free of charge on our website at www.valaris.com/investors. In addition, the SEC maintains an Internet sitea website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. These reports also are available in print without charge by contacting our Investor Relations Department as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The information contained on our website is not included as part of, or incorporated by reference into, this report.
RISK FACTORS SUMMARY
An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this Form 10-K, before making a decision to invest in our securities. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.
Risks Related to Chapter 11 Proceedings
•Operating under the Bankruptcy Court protection for a long period of time may harm our business.
•We may not be able to obtain confirmation of a plan of reorganization.
•We have substantial liquidity needs and may not be able to obtain sufficient liquidity for the duration of the Chapter 11 Cases or to confirm a plan of reorganization or liquidation.
•As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.
•We may be subject to claims that will not be discharged in the Chapter 11 Cases.
•Our actual financial results may vary significantly from the projections filed with the Bankruptcy Court.
•The pursuit of the Chapter 11 Cases has consumed and will continue to consume a substantial portion of the time and attention of our management, and we may face increased levels of employee attrition.
•Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks.
•In certain instances, a chapter 11 case may be converted to a case under chapter 7 of the Bankruptcy Code.
•Any plan of reorganization that we may implement will be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, our plan may be unsuccessful in its execution.
•We may not be able to achieve our stated goals and continue as a going concern under a plan of reorganization.
•Our ability to use our net operating loss carryforwards ("NOLs") may be limited by changes in ownership due to the Chapter 11 Cases.
Risks Related to Our Business, Operations, Financing Arrangements and Market Conditions
•The COVID-19 pandemic and recent developments in the oil and gas industry could adversely impact our financial condition and results of operations.
•The success of our business largely depends on the level of activity in theoffshore oil and natural gas industry,exploration, development and production, which can be significantly affected by volatile oil and natural gas prices.
•The offshore contract drilling industry historically has beenis highly competitive and cyclical, with periodscyclical.
•Our current backlog of low demandcontract drilling revenue may not be fully realized and excess rig availability that could resultmay decline significantly in adverse effects on our business.the future.
•Our business will be materially adversely affected if we are unable to secure contracts on economically favorable terms or if option periods in existing contracts are not exercised as expected.
•We have a significant amount of debt. Our debt levels and debt agreement restrictions may limit our liquidity, our ability to obtain additional financing and our pursuit of other business opportunities.
•Our customers may be unable or unwilling to fulfill their contractual commitments to us, including their obligations to pay for losses, damages or other liabilities.
•We may suffer losses if our customers terminate or seek to renegotiate our contracts, if operations are suspended or interrupted or if a rig becomes a total loss.
•We may incur impairments as a result of future declines in demand for offshore drilling rigs.
•The loss of a significant customer or customer contract, as well as customer consolidation and changes to customer strategy, could materially adversely affect us.
•Our current backlog of contract drilling revenue may not be fully realized and may decline significantly in the future.
•We may not realize the expected benefits of the ARO joint venture, which depends on a single customer for its income and accounts receivable, and our inability to realize such benefits may introduce additional risks to our business.
•We have taken, and continueOur long-term contracts are subject to take, cost-reduction actions,the risk of cost increases, which may not be successful.
•We may have difficulty obtaining or maintaining insurance in the future on terms we find acceptable andcould adversely affect our insurance coverage may not protect us against all of the risks and hazards we face, including those specific to offshore operations.
•The potential for U.S. Gulf of Mexico hurricane related windstorm damage or liabilities could result in uninsured losses and may cause us to alter our operating procedures during hurricane season.profitability.
•Our drilling contracts with national oil companies may expose usnetwork and systems, including rig operating systems and critical data, are subject to greatercybersecurity risks than we normally assume in drilling contracts with non-governmental customers.
•Geopolitical events and violence could affect the markets for our services and have a material adverse effect on our business and cost and availability of insurance.technical disruptions.
•Rig construction,reactivation, upgrade enhancement and reactivationenhancement projects are subject to risks, including delays and cost overruns, which could have a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
•FailureWe make significant expenditures to recruit and retain skilled personnel could adversely affect our business.
•We have historically made significant capital expenditures tomeet customer requirements, maintain our fleet to comply with laws and the applicable regulations and standards of governmental authorities and organizations, or to expand our fleet, and we may be required to make significant capital expenditures to maintain our competitiveness.
•Failure to recruit and retain skilled personnel could adversely affect our business.
•Our shared service center may not create the operational efficiencies that we expect and may create risks relating to the processing of transactions and recording of financial information.
•We may not realize the expected benefits of our ARO joint venture.
•Joint venture investments could be adversely affected by our joint venture partners’ actions, financial condition and liquidity and disputes between us and our joint venture partners.
•Our business involves operating hazards, and our insurance and indemnities from our customers may not be adequate to cover any potential losses.
•Geopolitical events and violence could materially adversely affect the markets for our services and have a material adverse effect on our business and cost and availability of insurance.
•Our drilling contracts with national oil companies may expose us to greater risks than we normally assume in drilling contracts with non-governmental customers.
•Unionization efforts and labor regulations in certain countries in which we operate could materially increase our costs or limit our flexibility.flexibility with regard to the management of our personnel.
•Significant partequipment or equipmentpart shortages, supplier capacity constraints, supplier production disruptions, supplier quality and sourcing issues or price increases could increasematerially adversely affect our financial position, operating costs, decrease our revenues and adversely impact our operations.results or cash flows.
•Our long-term contracts are subjectoperating and maintenance costs will not necessarily fluctuate in proportion to the risk of cost increases, which could adversely affectchanges in our profitability.operating revenues.
•Our information technology systems, including rigability to pay our operating systems, are subject to cybersecurity risks and threats.capital expenses and make payments due on our debt depends on many factors beyond our control.
•The agreements governing our debt, including the Indenture and the Credit Agreement, contain various covenants that impose restrictions on us and certain of our subsidiaries.
Risks Related to Our Indebtedness and Ordinary Shares
We may experience risks associated with future mergers, acquisitions or dispositions of businesses or assets or other strategic transactions.
•Our Class A ordinary shares have been delistedactual financial results after emergence from bankruptcy may not be comparable to our projections filed with the NYSE.Bankruptcy Court in the course of the Chapter 11 Cases.
•The accounting method for our 2024 Convertible Notes could have a material effect on our reported financial results.
•Transfersexercise of all or any number of outstanding warrants or the issuance of stock-based awards may dilute the holders of our Class A ordinary shares may be subject to stamp duty or stamp duty reserve tax ("SDRT") in the U.K., which would increase the cost of dealing in our Class A ordinary shares.
•If our Class A ordinary shares are not eligible for continued deposit and clearing within the facilities of DTC, then transactions in our securities may be disrupted.
•We have less flexibility as a U.K. public limited company with respect to certain aspects of capital management than U.S. corporations due to increased shareholder approval requirements.
•Our articles of association contain anti-takeover provisions; however, the Company is not subject to the U.K.'s City Code on Takeovers and Mergers.
•English law requires that we meet certain additional financial requirements before declaring dividends and returning funds to shareholders.Common Shares.
Regulatory, Legal Regulatory and Tax Risks
•Failure to comply with anti-corruption and anti-bribery statutes such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, could result in fines, criminal penalties and drilling contract terminations and an adverse effect on our business.terminations.
•Increasing regulatory complexity could adversely impact the costs associated with our offshore drilling operations and reduce demand.
•Compliance with or breach of environmental laws can be costly and could limit our operations.
•Regulation of greenhouse gases and climate change could have a negative impact on our business.
•The IRSU.S. Internal Revenue Service (“IRS”) may not agree with the conclusion that we should be treated as a foreign corporation for U.S. federal tax purposes.
•U.S. tax laws and IRS guidance could affect our ability to engage in certain acquisition strategies and certain internal restructurings.
•Governments may pass laws that subject us to additional taxation or may challenge our tax positions.
•Our consolidated effective income tax rate may vary substantially over time.
•Investor enforcement of civilWe are subject to litigation that could have a material adverse effect on us.
•As a Bermuda company, it may be difficult enforcing judgments against us, our directors and officers.
•Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
•Provisions in our bye-laws could delay or prevent a change in control of our company.
•Legislation enacted in Bermuda as to Economic Substance may be more difficult.affect our operations.
•Our business could be affected as a result of activist investors.
Risks Related to Our International Operations:Operations
•Our non-U.S. operations involve additional risks not typically associated with U.S. operations.
Sustainability Risks
•The U.K.'s withdrawal from the E.U. mayRegulation of GHGs and climate change could have a negative effectimpact on economic conditions, financial markets and our business.
•Consumer preferences for alternative fuels and electric-powered vehicles, as part of the global energy transition, may lead to reduced demand for our services.
•Increased scrutiny from stakeholders and others regarding our sustainability practices, initiatives and reporting responsibilities could result in additional costs or risks.
Item 1A. Risk Factors
Risks Related to Chapter 11 Proceedings
We are subject to the risks and uncertainties associated with the Chapter 11 Cases.
On August 19, 2020, the Debtors filed the Chapter 11 Cases in the United States Bankruptcy Court for the Southern District of Texas. For the duration of the Chapter 11 Cases, our operations and our ability to develop and execute the business plan, as well as our continuation as a going concern, are subject to risks and uncertainties associated with bankruptcy. These risks include the following:
•our ability to execute, confirm and consummate a plan of reorganization as contemplated by the Amended RSA with respect to the Chapter 11 Cases;
•the high costs of bankruptcy proceedings and related fees;
•our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence;
•our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties;
•our ability to maintain contracts that are critical to our operations;
•our ability to execute our business plan in the current depressed commodity price environment;
•our ability to attract, motivate and retain key employees;
•the ability of third parties to seek and obtain court approval to terminate contracts and other agreements with us;
•the ability of third parties to seek and obtain court approval to convert the Chapter 11 Cases to a chapter 7 proceeding; and
•the actions and decisions of our creditors and other third parties who have interests in the Chapter 11 Cases that may be inconsistent with our plans.
Delays in the Chapter 11 Cases increase the risks of us being unable to reorganize our business and emerge from bankruptcy, and also increase our costs associated with the bankruptcy process.
These risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with the Chapter 11 Cases could adversely affect our relationships with customers, suppliers, service providers, employees and other third parties, which in turn could adversely affect our operations and financial condition. Also, pursuant to the Bankruptcy Code, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond in a timely fashion to certain events or take advantage of certain opportunities. We also need Bankruptcy Court confirmation of a plan of reorganization as contemplated by the Amended RSA. Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact that events that occur during or as a result of the Chapter 11 Cases will have on our business, financial condition, results of operations and cash flows.
Even if a plan of reorganization is consummated, we will continue to face a number of risks, including those associated with our ability to reduce expenses, implement any strategic initiatives and generally maintain favorable relationships with and secure the confidence of our customers, suppliers, service providers, employees and other third parties. Accordingly, we cannot guarantee that the proposed financial restructuring will achieve our stated goals nor can we give any assurance of our ability to continue as a going concern.
Operating under the Bankruptcy Court protection for a long period of time may harm our business.
A long period of operations under the protection of the Bankruptcy Court could have a material adverse effect on our business, financial condition, results of operations and liquidity. A prolonged period of operating under Bankruptcy Court protection may also make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships. So long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases.
Furthermore, we cannot predict the ultimate terms of settlement of the liabilities that will be subject to a plan of reorganization. Even once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from chapter 11 bankruptcy.
We may not be able to obtain confirmation of a plan of reorganization.
To emerge successfully from Bankruptcy Court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to a chapter 11 plan of reorganization, solicit and
obtain the requisite acceptances of such a reorganization plan and fulfill other statutory conditions for confirmation of such a plan. However, even if a plan of reorganization as contemplated by the Amended RSA meets other requirements under the Bankruptcy Code, certain interested parties may file objections to the plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Even if no objections are filed and the requisite acceptances of our plan are received from creditors entitled to vote on the plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the plan of reorganization. The precise requirements and evidentiary requirements for having a plan confirmed, notwithstanding its rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors including, without limitation, the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims, subordinated or senior claims).
If a plan of reorganization is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if anything, holders of claims against us would ultimately receive with respect to their claims.
We have substantial liquidity needs and may not be able to obtain sufficient liquidity for the duration of the Chapter 11 Cases or to confirm a plan of reorganization or liquidation.
Although we have lowered our capital budget and reduced the scale of our operations significantly, our business remains capital intensive. In addition to the cash requirements necessary to fund ongoing operations, we have incurred, and expect to continue to incur, significant professional fees and other costs in connection with the Chapter 11 Cases. As of December 31, 2020, our total available liquidity was $825.8 million, which included $325.8 million of cash on hand and $500.0 million available under our DIP Facility. We expect to continue using cash on hand that will further reduce this liquidity. With the Bankruptcy Court’s authorization to use cash collateral under the DIP Credit Agreement, we believe that we will have sufficient liquidity, including cash on hand, to fund anticipated cash requirements through the Chapter 11 Cases. As such, we expect to pay vendor obligations on a go-forward basis according to the terms of our current contracts and consistent with applicable court orders, if any, approving such payments. However, there can be no assurance that our current liquidity will be sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases or to pursue confirmation of a plan of reorganization. We can provide no assurance that we will be able to secure additional interim financing or exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, that such funds will be offered to us on acceptable terms.
As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections and claims assessments significantly impact our financial results. As a result, our historical financial performance is likely not indicative of financial performance after the date of the bankruptcy filing. In addition, if we emerge from chapter 11, the amounts reported in subsequent periods may materially change relative to historical results, including due to revisions to our operating plans pursuant to a plan of reorganization. We anticipate that we will adopt fresh start accounting upon our emergence from chapter 11, becoming a new entity for financial reporting purposes. As a result, upon emergence, the Company’s assets and liabilities will generally be reported at fair value and will reconcile to the enterprise value confirmed by the Bankruptcy Court. These fair values are expected to differ materially from the amounts reflected on our historical balance sheet.
We may be subject to claims that will not be discharged in the Chapter 11 Cases.
The Bankruptcy Code provides that the confirmation of a plan of reorganization may discharge a debtor from substantially all debts arising prior to the Petition Date. Although the Company intends to pay pre-petition trade claims in full, with few exceptions, all claims that arose before the Petition Date (1) are subject to compromise and/or treatment under a plan of reorganization and/or (2) could be discharged in accordance with the terms of a plan of reorganization. The Bankruptcy Code excepts certain pre-petition claims from discharge for corporate debtors, including certain debts owed to governmental entities obtained by, among other things, false
representations or actual fraud. Any claims not ultimately discharged through a plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on their financial condition and results of operations on a post-reorganization basis.
Our actual financial results may vary significantly from the projections filed with the Bankruptcy Court.
In connection with the plan of reorganization process, we were required to prepare projected financial information to demonstrate to the Bankruptcy Court the feasibility of the restructuring plan and our ability to continue operations upon emergence from bankruptcy. At the time they were last filed with the Bankruptcy Court on December 30, 2020, the projections reflected numerous assumptions concerning anticipated future performance and prevailing and anticipated market and economic conditions that were and continue to be beyond our control and that may not materialize. Further, to the extent we issue new guidance, such projections will supersede any prior guidance. Projections, in any event, are inherently subject to uncertainties and to a wide variety of significant business, economic and competitive risks. Our actual results will vary from those contemplated by our projections and the variations may be material.
The pursuit of the Chapter 11 Cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.
While the Chapter 11 Cases continue, our management will be required to spend a significant amount of time and effort focusing on the Chapter 11 Cases instead of focusing exclusively on our business operations. This diversion of attention may have a material adverse effect on the conduct of our business, and, as a result, our financial condition and results of operations, particularly if the Chapter 11 Cases are protracted.
During the duration of the Chapter 11 Cases, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a material adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.
Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. It is possible that our Class A ordinary shares will be cancelled pursuant to the plan of reorganization and holders of any such ordinary shares will receive only such distributions as set forth in the plan of reorganization, which may result in such holders being unable to recover their investments.
A significant amount of our indebtedness is senior to the Class A ordinary shares in our capital structure. It is unclear at this stage of the Chapter 11 Cases if any plan of reorganization would allow for distributions with respect to our Class A ordinary shares and other outstanding equity interests without the consent of the senior debt holders. It is possible that these equity interests may be cancelled and extinguished upon the approval of the Bankruptcy Court and the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests. In the event of a cancellation of these equity interests, amounts invested by such holders in our outstanding equity securities will not be recoverable. Under the current plan of reorganization, holders of our Class A ordinary shares may be entitled to receive their pro rata share of 7-year warrants to purchase up to 7% of New Equity (subject to dilution). However, if our plan of reorganization is not approved, our currently outstanding Class A ordinary shares may have no value. Trading prices for our Class A ordinary shares are very volatile and may bear little or no relationship to the actual recovery, if any, by the holders of such securities in the Chapter 11 Cases. Accordingly, we urge that extreme caution be exercised with respect to existing and future investments in our equity securities and any of our other securities.
In certain instances, a chapter 11 case may be converted to a case under chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under chapter 7
of the Bankruptcy Code. In such event, a chapter 7 trustee would be appointed or elected to liquidate our assets and the assets of our subsidiaries for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in a plan of reorganization because of (1) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (2) additional administrative expenses involved in the appointment of a chapter 7 trustee, and (3) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
Any plan of reorganization that we may implement will be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, our plan may be unsuccessful in its execution.
Any plan of reorganization that we may implement could affect both our capital structure and the ownership, structure and operation of our businesses and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. In addition, any plan of reorganization will rely upon financial projections, including with respect to revenues, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (1) our ability to substantially change our capital structure, (2) our ability to obtain adequate liquidity and financing sources, (3) our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them, (4) our ability to retain key employees and (5) the overall strength and stability of general economic conditions of the financial and oil and gas industries, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of any plan of reorganization.
We may not be able to achieve our stated goals and continue as a going concern under a plan of reorganization.
Even if a plan of reorganization is consummated, we will continue to face a number of risks. For example, improvements in demand for offshore drilling services and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized. Accordingly, we cannot guarantee that a plan of reorganization will achieve our stated goals.
Furthermore, even if our debts are reduced or discharged through such plan, we may need to raise additional funds through public or private debt or equity financing or other means to fund our business after the completion of the Chapter 11 Cases. Our access to additional financing is, and for the foreseeable future will likely continue to be, extremely limited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms, if they are available at all.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital. As a result, we cannot give any assurance of our ability to continue as a going concern, even if a chapter 11 plan of reorganization is confirmed.
Our ability to use our NOL carryforwards may be limited by changes in ownership due to the Chapter 11 Cases.
As of December 31, 2020, we had deferred tax assets of $2.3 billion relating to $9.7 billion of NOL carryforwards, $171.2 million for U.S. foreign tax credits (“FTCs”) and $221.2 million for U.S. and U.K. interest limitation carryforwards, which can be used to reduce our income taxes payable in future years. NOL
carryforwards, which were generated in various jurisdictions worldwide, include $9.5 billion that do not expire and $223.0 million that will expire, if not utilized, between 2021 and 2040. Deferred tax assets for NOL carryforwards at December 31, 2020 include $1.4 billion and $687.3 million pertaining to NOL carryforwards in Luxembourg and the United States, respectively. The U.S. FTCs expire between 2021 and 2028. The interest limitation carryforwards do not expire. Due to the uncertainty of realization, we have a $2.7 billion valuation allowance on deferred taxes relating to NOL carryforwards, U.S. FTCs and interest limitation carryforwards.
Under Section 382 of the Internal Revenue Code (“IRC”), changes in our ownership, in certain circumstances, will limit the amount of U.S. NOL carryforwards, FTCs and interest limitation carryforwards that can be utilized annually in the future to offset U.S. taxable income. Calculations pursuant to Section 382 of the IRC can be very complicated and no assurance can be given relative to our ability to utilize our U.S. NOL carryforwards, FTCs and interest limitation carryforwards in the future. If we are limited in our ability to use our U.S. NOL carryforwards, FTCs and interest limitation carryforwards in future years in which we have taxable income, we will pay more taxes than if we were able to utilize them fully. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership that we cannot predict or control that could result in further limitations being placed on our ability to utilize our U.S. NOL carryforwards, FTCs and interest limitation carryforwards.
Risks Related to Our Business, Operations, Financing Arrangements and Market Conditions
The COVID-19 pandemic and recent developments in the oil and gas industry has, and could continue to, adversely impact our financial condition and results of operations.
The COVID-19 pandemic and related public health measures implemented by governments worldwide have negatively impacted the global macroeconomic environment and resulted in a sharp decline in global oil demand and prices. As of February 2021, crude oil prices have recovered from the historic lows seen in the first half of 2020 and have returned to 2019 prices. However, our customers have generally lowered their capital expenditure plans, in many cases significantly, in light of revised pricing expectations. To date, there have been various impacts from the pandemic and the resultant drop in oil prices, including contract cancellations and the cancellation of drilling programs by operators, contract concessions, stacking rigs, inability to change crews due to travel restrictions, and workforce reductions. Our operations and business may be subject to further disruptions as a result of the spread of coronavirus among our workforce, the extension or imposition of further public health measures affecting our supply chain and logistics, and the impact of the pandemic on key customers, suppliers, and other counterparties. Oil prices are expected to continue to be volatile as a result of the near-term production instability, ongoing COVID-19 outbreaks, the implementation of vaccination programs and the related impact on overall economic activity, changes in oil inventories, industry demand and global and national economic performance.
The success of our business largely depends on the level of activity in theoffshore oil and natural gas industry,exploration, development and production, which can be significantly affected by volatile oil and natural gas prices.
The success of our business largely depends on the level of activity in offshore oil and natural gas exploration, development and production. Oil and natural gas prices, and market expectations of potential changes in these prices, significantly affect the level of drilling activity. Historically, when drilling activity and operator capital spending decline,declines, utilization and day rates also decline and drilling may be reduced or discontinued, resulting in an oversupply of drilling rigs. The oversupply of drilling rigs will be exacerbated by the entry of newbuild rigs into the market. Oil and natural gas prices have historically been volatile, and have declined significantly from prices in excess of $100 since mid-2014, causing operators to reduce capital spending and cancel or defer existing programs, substantially reducing the opportunities for new drilling contracts. Brent crude averaged nearly $42 per barrel in 2020 with a year-end price of $51. Commodity prices in 2021 have not improved to a level that supports increased rig demand sufficient to absorb existing rig supply and generate meaningful increases in day rates. We expect these trends to continue as long as commodity prices and rig supply remain at current levels. The lack of a meaningful recovery of oil and natural gas prices or further price reductions or volatility in prices may cause our customers to maintain historically low capital spending levels or further reduce their overall level of activity, indecline.
which case demand for our services may further decline and revenues may continue to be adversely affected through lower rig utilization and/or lower day rates. Numerous factors may affect oil and natural gas prices and the level of demand for our services, including:
•regional and global economic conditions and changes therein,
•COVID-19 and related public health measures implemented by governments worldwide and the occurrence or threat of other epidemic or pandemic diseases and any government response to such occurrence or threat,
including recessions,
•oil and natural gas supply and demand,
which is affected by worldwide economic activity and population growth,
•expectations regarding future energy prices,
•the desire and ability of the Organization of Petroleum Exporting Countries ("OPEC")OPEC+, its members and other oil-producing nations, such as Russia, to reach further agreements to set and maintain production levels and pricing and to implement existing and future agreements,
•the availability of capital for oil and natural gas participants, including our customers, and capital allocation decisions by our customers, including the relative economics of offshore development versus onshorealternative prospects,
•the level of production by non-OPEC countries,
•U.S. and non-U.S. tax policy,
including the U.K. windfall tax on oil and gas producers in the British North Sea,
•advances in exploration and development technology,
including with respect to onshore shale,
•costs associated with exploring for, developing, producing and delivering oil and natural gas,
•the rate of discovery of new oil and natural gas reserves and the rate of decline of existing oil and gas reserves,
•investors reducing, or ceasing to provide, funding to the oil and natural gas industry in response to initiatives to limit climate change,
•laws and government regulations that limit, restrict or prohibit exploration and development of oil and natural gas in various jurisdictions, or materially increase the cost of such exploration and development, (such as the current moratorium on oil and gas leasing and permitting in federal lands and waters),
•the development and exploitation of alternative fuels or energy sources, resulting in reduced capital spending by our customers on oil and natural gas projects, and increased demand for electric-powered products, including electric-powered vehicles,
•disruption to exploration and development activities due to hurricanes and other severeadverse weather conditions and the risk thereof,
•natural disasters or incidents resulting from operating hazards inherent in offshore drilling, such as oil spills, and
•the worldwide military or political environment, including the invasion of Ukraine by Russia and the conflict in the Middle East and any related political or economic responses, global macroeconomic effects of trade disputes and increased tariffs and sanctions and uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas of the Middle East or geographic areas in which we operate, or acts of terrorism.terrorism, and
Despite significant declines in capital spending and cancelled or deferred drilling programs by many operators since 2014, oil and gas production has not yet been reduced by amounts sufficient to result in a rebound in pricing to levels seen in 2014, and we may not see sufficient supply reductions or a resulting rebound in pricing for an extended period of time. Further, the agreements of OPEC and certain non-OPEC countries to freeze and/or cut production may not be fully realized. The lack of actual production cuts or freezes, or the perceived risk that OPEC
countries may not comply with•the occurrence or threat of epidemic or pandemic diseases and any government response to such agreements, may result in depressed commodity prices for an extended period of time.occurrence or threat.
Higher commodity prices may not necessarily translate into increased activity, however, and even during periods of high commodity prices, customers may cancel or curtail their drilling programs, or reduce their levels of capital expenditureexpenditures for exploration and production for a variety of reasons, including their expectations for future oil and natural gas prices, andthe cost of exploration efforts, extended periods of price volatility, their lack of success in exploration efforts. Advances in onshore explorationefforts and development technologies, particularly with respect to onshore shale, could also result in our customers allocating more of theirre-allocating capital expenditure budgets to onshore exploration and production activities and less to offshore activities. expenditures for renewable energy projects.
These factors could cause our revenues and profits to decline further, as a result of declines in utilization and day rates, and limit our future growth prospects. Any significant decline in day rates or utilization of our drilling rigs could materially reduceadversely affect our revenuesfinancial position, operating results and profitability.cash flows. In addition, these risks could increase instability in the financial and insurance markets and make it more difficult for us to access capital and obtain insurance coverage that we consider adequate or are otherwise required by our contracts.
The offshore contract drilling industry historically has beenis highly competitive and cyclical, with periods of low demand and excess rig availability that could result in adverse effects on our business.cyclical.
Our industry is highly competitive, and our contracts are traditionally awarded on a competitive bid basis. Pricing, safety records and competency are key factors in determining which qualified contractor is awarded a job.contract. Rig availability, location and technical capabilities also can be significant factors in the determination. If we are not able to compete successfully, our revenues and profitability may be reduced.decline.
TheDemand for offshore contract drilling industry historically has been veryservices is highly cyclical, andwhich is primarily related todriven by the demand for drilling rigs and the available supply of drilling rigs. Demand for drilling rigs is directly related todriven by the regional and worldwide levels of offshore exploration and development spendingconducted by oil and natural gas companies, which is beyond our control. Offshore explorationcontrol and development spending may fluctuate substantially from year-to-year and from region-to-region.
The significant decline in oil and gas prices and resulting reduction in spending by our customers, together with the increase in supply of offshore drilling rigs in recent years, has resulted in an oversupply of offshore drilling rigs and a decline in utilization and day rates, a situation which may persist for many years.
Such a prolonged periodProlonged periods of reduced demand and/or excess rig supply hashave required us, and may in the future require us, to idle, sell or scrap rigs and enter into low day rate contracts or contracts with unfavorable terms. There can be no assurance that the current demand for drilling rigs will increase in the future.future or that any short-term improvement to market conditions will be sustained. Any further decline in demand for drilling rigs or a continued oversupply of drilling rigs could materially adversely affect our financial position, operating results or cash flows.
Our current backlog of contract drilling revenue may not be fully realized and may decline significantly in the future.
As of February 15, 2024 and February 21, 2023, our contract backlog was approximately $3.9 billion and $2.5 billion, respectively. This amount reflects the remaining contractual terms multiplied by the applicable contractual day rate. The contractual revenue may be higher than the actual revenue we ultimately receive because of a number of factors, including rig downtime or suspension of operations.
Several factors could cause rig downtime or a suspension of operations, many of which are beyond our control, including the early termination, repudiation or renegotiation of contracts, breakdowns of equipment, work stoppages, including labor strikes, shortages of material or skilled labor, surveys or inspections by government and maritime authorities, inability to obtain the requisite permits or approvals, periodic classification surveys, severe weather, strong ocean currents or harsh operating conditions, the occurrence or threat of epidemic or pandemic diseases, and any government response to such occurrence or threat and force majeure events.
Our customers may seek to terminate, repudiate or renegotiate our drilling contracts for various reasons, including in the event of damage or a total loss of the drilling rig, the suspension or interruption of operations for extended periods due to breakdown of major rig equipment, failure to comply with performance conditions or equipment specifications, the failure of the customer to receive final investment decision (FID) with respect to projects for which the drilling rig was contracted or other reasons and “force majeure” events beyond the control of either party or other specific conditions. Generally, our drilling contracts permit early termination of the contract by the customer for convenience (without cause), exercisable upon advance notice to us, and in certain cases without making an early termination payment to us. In cases where customers are required to make an early termination payment, such payments would provide some level of compensation to us for the lost revenue from the contract but in many cases would not fully compensate us for all of the lost revenue. There can be no assurances that our customers will be able to or willing to fulfill their contractual commitments to us.
A decline in oil and natural gas prices and any resulting downward pressure on utilization may cause some customers to consider early termination of select contracts despite having to pay onerous early termination fees in certain cases. Customers may request to renegotiate the terms of existing contracts, or they may request early termination or seek to repudiate contracts. In addition, financially distressed customers may seek to negotiate reduced termination fees as part of a restructuring package. Furthermore, as contracts expire, we may be unable to secure new contracts for our drilling rigs. Therefore, revenues recorded in future periods could differ materially from our current backlog. Our inability to realize the full amount of our contract backlog or to secure a new contract with substantially similar terms on a timely basis could materially adversely affect our financial position, operating results or cash flows.
Our business will be materially adversely affected if we are unable to secure contracts on economically favorable terms or if option periods in existing contracts are not exercised as expected.
Our ability to renew expiring contracts or obtain new contracts and the terms of any such contracts will depend on market conditions. In December 2023, we took delivery of VALARIS DS-13 and VALARIS DS-14 (the "Newbuild Drillships") for an aggregate purchase price of approximately $337.0 million, which are currently uncontracted. Our customers’ decisions to exercise option periods resulting in additional work for the rig under contract also depend on market conditions. We may be unable to renew our expiring contracts, including contracts expiring fordue to a failure by the customer to exercise option periods, or obtain new contracts for the Newbuild Drillships or the drilling rigs under contracts that have expired or have been terminated, andterminated. In addition, the day rates under any new contracts or any renegotiated contracts may be substantially below the existing day rates, which could materially adversely affect our revenues and profitability. In addition, iffinancial position, operating results or cash flows. If customers do not exercise option periods under contracts that we currently expect to be exercised, we may face longer downtimeincreased idle time associated with the related rig,rigs, as we wouldmay have difficulty tendering that rig forsecuring additional work to cover the option period.
On December 30, 2020, we reached an agreement in principle to amend and assume pursuant to section 365 of the Bankruptcy Code two agreements for the construction of two new rigs, which was subsequently modified through further negotiations. On February 26, 2021, we entered into amended agreements that extend the delivery date for both new rigs to December 31, 2023. The two rigs under construction are currently uncontracted. There is no assurance that we will secure drilling contracts for these rigs, or future rigs we construct or acquire, or that the drilling contractsperiods. In addition, we may be ablechoose to secure will be based upon rates and termsstack idle rigs that will provide a reasonable rate of return on these investments. Our failureare not under contract, which would require us to secure contractsincur stacking costs for these rigs at day rates and terms that result in a reasonable return upon completion of construction may result in a material adverse effect on our financial position, operating results or cash flows.
We have a significant amount of debt. Our debt levels and debt agreement restrictions may limit our liquidity, our ability to obtain additional financing our pursuit of other business opportunities.
As of December 31, 2020, we had $7.1 billion in total debt outstanding, representing approximately 61.9% of our total capitalization. Our current indebtedness may have several important effects on our future operations, including:
•a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest, and
•our ability to access capital markets, refinance our existing indebtedness, raise capital on favorable terms, or obtain additional financing to fund working capital requirements, capital expenditures, acquisitions, debt service requirements, execution of our business strategy and general corporate or other cash requirements may be limited.
Our ability to maintain a sufficient level of liquidity to meet our financial obligations will be dependent upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. For 2020 and 2019, our cash flows from operating activities of continuing operations were negative $251.7 million and $276.9 million, respectively, and we further incurred capital expenditures on continuing operations of $93.8 million and $227.0 million, respectively. Our operating activities and capital expenditures are expected to continue to result in negative annual cash flow in 2021. Meaningful recovery in drilling demand and day rates are required for annual cash flow to turn positive.
To the extent we are unable to repay our debt and other obligations as they become due with cash on hand or from other sources, we will need to restructure or refinance all or part of our debt, sell assets, reduce capital expenditures, borrow more cash or raise equity. Additional indebtedness or equity financing may not be available to us in the future for the refinancing or repayment of existing debt and other obligations, or if available, such additional debt or equity financing may not be available in a sufficient amount, on a timely basis, or on terms acceptable to us and within the limitations specified in our then existing debt instruments. In addition, in the event we decide to sell additional assets, we can provide no assurance as to the timing of any asset sales or the proceeds that could be realized by us from any such asset sale.
Our revolving credit facility places restrictions on us and certain of our subsidiaries with respect to incurring additional indebtedness and liens, paying dividends and other payments to shareholders, repurchasing our ordinary shares, repurchasing or redeeming certain other indebtedness which matures after the revolving credit facility, entering into mergers and other matters. Our revolving credit facility also requires compliance with covenants to maintain specified financial and guarantee coverage ratios, including a total debt to total capitalization ratio that is less than or equal to 60%. As of December 31, 2020, our total debt to total capitalization ratio was 61.9%.
As of August 19, 2020, we have been in default under certain of our debt instruments. Our filing of the Chapter 11 Cases accelerated our obligations under the Senior Notes (as defined below). Additionally, events of
default under the indentures governing our Senior Notes have occurred and are continuing, including as a result of cross-defaults between such indentures.rigs.
Our customers may be unable or unwilling to fulfill their contractual commitments to us, including their obligations to pay for losses, damages or other liabilities.
CertainSome of our customers aremay be subject to liquidity risk and such riskthat could lead them to seek to repudiate, cancel or renegotiate our drilling contracts or fail to fulfill their commitments to us under those contracts. These risks are heightened in periods of depressed market conditions. Our drilling contracts provide for varying levels of indemnification from our customers, including with respect to well-control, reservoir liability and pollution. Our drilling contracts also provide for varying levels of indemnification and allocation of liabilities between our customers and us with respect to loss or damage to property and injury or death to persons arising from the drilling operations we perform. Under our drilling contracts, liability with respect to personnel and property customarily is allocated so that we and our customers each assume liability for our respective personnel and property. Our customers have historically assumed most of the responsibility for, and indemnified us from any loss, damage or other liability resulting from, pollution or contamination, including clean-up and removal, and third-party damages arising from operations under the contract when the source of the pollution originates from the well or reservoir, including those resulting from blow-outsblowouts or cratering of the well. However, we regularly are required to assume a limited amount of liability for pollution damage caused by our negligence, which
liability generally has caps for ordinary negligence, with much higher caps or unlimited liability where the damage is caused by our gross negligence or willful misconduct. Notwithstanding a contractual indemnity from a customer, there can be no assurance that our customers will be financially able to assumefulfill their responsibility and honor their indemnityindemnification obligations to us for such losses. In addition, under the laws of certain jurisdictions, such indemnities under certain circumstances are not enforceable if the cause of the damage was our gross negligence or willful misconduct. This could result in us having to assume liabilities in excess of those agreed in our contracts due to customer balance sheet or liquidity issues or applicable law.
We may suffer losses if our customers terminate or seek to renegotiate our contracts, if operations are suspended or interrupted or if a rig becomes a total loss.
In market downturns similar to the current environment, our customers may not be able to honor the terms of existing contracts, may terminate contracts even where there may be onerous termination fees, may seek to void or otherwise repudiate our contracts including by claiming we have breached the contract, or may seek to renegotiate contract day rates and terms in light of depressed market conditions. Since early 2015, we have renegotiated a number of contracts and received termination notices with respect to several of our rigs. Often, our drilling contracts are subject to termination without cause or termination for convenience upon notice by the customer. In certain cases, our contracts require the customer to pay an early termination fee in the event of a termination for convenience (without cause). Such payment would provide some level of compensation to us for the lost revenue from the contract but in many cases would not fully compensate us for all of the lost revenue. Certain of our contracts permit termination by the customer without an early termination fee. Furthermore, financially distressed customers may seek to negotiate reduced termination fees as part of a restructuring package. During 2020, the offshore drilling market suffered serious negative effects in relation to the COVID-19 pandemic and a significant drop in oil and gas commodity prices. Global economic shutdowns driven by COVID-19 served to exacerbate the reduction in world demand for oil and gas which then prompted operators to slash budgets and defer, cancel and/or renegotiate rates for existing contracts.
Drilling contracts customarily specify automatic termination or termination at the option of the customer in the event of a total loss of the drilling rig and often include provisions addressing termination rights or reduction or cessation of day rates if operations are suspended or interrupted for extended periods due to breakdown of major rig equipment, unsatisfactory performance, "force majeure" events beyond the control of either party or other specified conditions.
If a customer cancels a contract or if we terminate a contract due to the customer’s breach and, in either case, we are unable to secure a new contract on a timely basis and on substantially similar terms, or if a contract is disputed or suspended for an extended period of time or renegotiated, it could materially and adversely affect our financial position, operating results or cash flows.
We may incur impairments as a result of future declines in demand for offshore drilling rigs.
We evaluate the carrying value of our property and equipment, primarily our drilling rigs, when events or changes in circumstances indicate that the carrying value of such rigs may not be recoverable. The offshore drilling industry historically has been highly cyclical, and it is not unusual for rigs to be idle or underutilized for significant periods of time and subsequently resume full or near full utilization when business cycles change. Likewise, during periods in which rig supply exceeds rig demand, competition may force us to contract our rigs at or near cash break-even rates for extended periods of time.
Since 2014 we have recorded pre-tax, non-cash losses on impairment of long-lived assets totaling $9.0 billion, including $3.6 billion aggregate pre-tax, non-cash impairments with respect to certain floaters, jackups and spare equipment, which we recorded during the first and second quarters of 2020. Further asset impairments may be necessary if market conditions remain depressed for longer than we expect. See "Note 7 - Property and Equipment" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
The loss of a significant customer or customer contract, as well as customer consolidation and changes to customer strategy, could materially adversely affect us.our business.
We provide our services to major international, government-owned and independent oil and natural gas companies. During 2020,2023, our five largest customers accounted for 41%40% of our consolidated revenues, in the aggregate, with our largest customer representing 11% of our consolidated revenues and a significant percentage of our operating cash flows. Our ability to retain existing significant customers may be adversely affected by the ongoing Chapter 11 Cases and certain of our largest customers have discussed with us our financial viability to perform for the duration of the potential terms of new contracts. Our financial position, operating results or cash flows may be materially adversely affected if any of our higher day rate contracts were terminated or renegotiated on less favorable terms or if a major customer terminates its contracts with us, fails to renew its existing contracts with us, requires renegotiation of our contracts or declines to award new contracts to us.
Our current backlogSome of contract drilling revenue may not be fully realizedour customers have consolidated and may decline significantlycould continue to consolidate and could use their size and purchasing power to achieve economies of scale and pricing concessions. In addition, certain of our customers are increasingly focusing their business strategy on renewable energy projects and away from oil and natural gas exploration and production. Such customer consolidation and strategic transitions could result in the future.
As of December 31, 2020, our contract backlog was approximately $1.2 billion, which represents a decline of $1.2 billion to the reported backlog of $2.5 billion as of December 31, 2019. This amount reflects the remaining contractual terms multipliedreduced capital spending by the applicable contractual day rate. The contractual revenue may be higher than the actual revenue we ultimately receive because of a number of factors, including rig downtime or suspension of operations. Several factors could cause rig downtime or a suspension of operations, many of which are beyond our control, including:
•the early termination, repudiation or renegotiation of contracts,
•breakdowns of equipment,
•work stoppages, including labor strikes,
•shortages of material or skilled labor,
•surveys by government and maritime authorities,
•periodic classification surveys,
•severe weather, strong ocean currents or harsh operating conditions,
•the occurrence or threat of epidemic or pandemic diseases and any government response to such occurrence or threat, and
•force majeure events.
Our customers, may seek to terminate, repudiate or renegotiatedecreased demand for our drilling contractsservices, loss of competitive position and negative pricing impacts. If we cannot maintain service and pricing levels for various reasons. Generally, our drilling contracts permit early termination of the contract by the customer for convenience (without cause), exercisable upon advance notice to us, and in certain cases without making an early termination payment to us. There can be no assurances that ourexisting customers will be able to or willing to fulfill their contractual commitments to us.
The decline in oil prices and the resulting downward pressure on utilization has caused and may continue to cause somereplace such revenues with increased business activities from other customers, to consider early termination of select contracts despite having to pay onerous early termination fees in certain cases. Customers may continue to request to renegotiate the terms of existing contracts, or they may request early termination or seek to repudiate contracts in some circumstances. Furthermore, as our existing contracts expire, we may be unable to secure new contracts for our rigs. Therefore, revenues recorded in future periods could differ materially from our current backlog. Our inability to realize the full amount of our contract backlog may have a material adverse effect on our financial position, operating results or cash flows.
We may not realize the expected benefits of the ARO joint venture, which depends on a single customer for its income and accounts receivable, and our inability to realize such benefits may introduce additional risks to our business.
In November 2016, Rowan and Saudi Aramco announced plans to form a 50/50 joint venture with Rowan and Saudi Aramco each selling existing drilling rigs and contributing capital as the foundation of the new company. The new entity, Saudi Aramco Rowan Offshore Drilling Company (ARO) commenced operations on October 17, 2017, and is expected to add up to 20 newbuild jackup rigs to its fleet over an approximate 10 year period. In January 2020, ARO ordered the first two newbuild jackups for delivery scheduled in 2022. There can be no assurance that the new jackup rigs will begin operations as anticipated or we will realize the expected return on our investment. We may also experience difficulty jointly managing the venture. Further, in the event ARO has insufficient cash from operations or is unable to obtain third party financing, we may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion. Any required capital contributions we make will negatively impact our liquidity position and financial condition. In 2017 and 2018, Rowan issued 10-year shareholder notes receivables to ARO, which are governed by the laws of Saudi Arabia, earn interest at LIBOR plus two percent and mature during 2027 and 2028. In the event that ARO is unable to repay these notes when they become due, we would require the prior consent of our joint venture partner to enforce ARO’s payment obligations. The notes receivable may be reduced by future Company obligations to the joint venture. In the event of a dispute with ARO over the repayment of the long-term notes receivable, our ability to enforce the payment obligations of ARO or to exercise other remedies are subject to several significant limitations, including that our ability to accelerate outstanding amounts under the long-term notes receivable is subject to the consent of Saudi Aramco and that the long-term notes receivable are governed by the laws of Saudi Arabia and we are limited to the remedies available under Saudi law.
As a result of these risks, it may take longer than expected for us to realize the expected returns from ARO or such returns may ultimately be less than anticipated. Additionally, if we are unable to make any required contributions, our ownership in ARO could be diluted which could hinder our ability to effectively manage ARO and adversely impact our operating results or financial condition.
ARO’s income and accounts receivable are concentrated with one customer. The loss of this customer, or a substantial decrease in demand by this customer for ARO’s services, would have a material adverse effect on ARO’s business, results of operations and financial condition, which could adversely impact our operating results or financial condition.
ARO, as a provider of offshore drilling services, faces many of the same risks as we face. Operating through ARO, in which we have a shared interest, may result in our having less control over many decisions made with respect to projects, operations, safety, utilization, internal controls and other operating and financial matters. ARO may not apply the same controls and policies that we follow to manage our risks, and ARO’s controls and policies may not be as effective. As a result, operational, financial and control issues may arise, which could have a material adverse effect on our financial condition and results of operations. Additionally, in order to establish or preserve our relationship with our joint venture partner we may agree to risks and contributions of resources that are proportionately greater than the returns we could receive, which could reduce our income and return on our investment in ARO compared to what we may traditionally require in other areas of our business.
We have taken, and continue to take, cost-reduction actions, which may not be successful.
After announcing significant synergy targets and cost savings in connection with the Rowan Transaction, we are implementing these and additional cost savings opportunities. As we implement these synergy and cost-saving initiatives, we may not realize anticipated savings or other benefits from one or more of the initiatives in the amounts or within the time periods we expect. The cost-reduction actions could negatively impact or disrupt our operations. The impact of these cost-reduction actions on our operations may be influenced by many factors, including declines in employee morale and the potential inability to meet operational targets due to our inability to retain or recruit key employees. Additionally, the cost-reduction actions could lead to the deterioration or failure of our operational and financial controls due to an inability to properly control and manage change, employee attrition, financial and operating system conversion and other factors that could adversely impact our business during the implementation or respective cost-reduction initiatives. If we experience any of these circumstances or otherwise fail to realize the anticipated savings or benefits from our synergy and cost-saving initiatives, our financial condition, results of operations and cash flows could be materially and adversely affected.
We may have difficulty obtaining or maintaining insurance in the future on terms we find acceptable and our insurance coverage may not protect us against all of the risks and hazards we face, including those specific to offshore operations.
Our operations are subject to hazards inherent in the offshore drilling industry, such as blow-outs, reservoir damage, loss of production, loss of well-control, uncontrolled formation pressures, lost or stuck drill strings, equipment failures and mechanical breakdowns, punchthroughs, craterings, industrial accidents, fires, explosions, oil spills and pollution. These hazards can cause personal injury or loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage, which could lead to claims by third parties or customers, suspension of operations and contract terminations. Our fleet is also subject to hazards inherent in marine operations, either while on-site or during mobilization, such as punch-throughs, capsizing, sinking, grounding, collision, damage from severe weather and marine life infestations. Additionally, a cyber-attack or other security breach of our information systems or other technological failure could lead to a material disruption of our operations, information systems and/or loss of business information, which could result in an adverse impact to our business. Our drilling contracts provide for varying levels of indemnification from our customers, including with respect to well-control and subsurface risks. For example, most of our drilling contracts incorporate a broad exclusion that limits the customer's indemnity rights for damages and losses resulting from our gross negligence and willful misconduct and for fines and penalties and punitive damages levied or assessed directly against us. We also maintain insurance for personal injuries, damage to or loss of equipment and other insurance coverage for various business risks.
We generally identify the operational hazards for which we will procure insurance coverage based on the likelihood of loss, the potential magnitude of loss, the cost of coverage, the requirements of our customer contracts and applicable legal requirements. Although we maintain what we believe to be an appropriate level of insurance covering hazards and risks we currently encounter during our operations, no assurance can be given that we will be able to obtain insurance against all potential risks and hazards, or that we will be able to maintain the same levels and types of coverage that we have maintained in the past. Our financial leverage and negative cash flow could cause insurance companies to increase our premiums and deductibles or limit our coverage amounts.
As a result of climate change activism or increased costs to insurance companies due to regulatory, geopolitical or other developments, insurance companies that have historically participated in underwriting energy-related risks may discontinue that practice, may reduce the insurance capacity they are willing to offer or demand significantly higher premiums or deductibles to cover these risks. Additionally, a significant number of energy-related insurance claims may increase insurance premiums to energy companies.
Furthermore, our insurance carriers may interpret our insurance policies such that they do not cover losses for all of our claims. Our insurance policies may also have exclusions of coverage for some losses. Uninsured exposures may include radiation hazards, certain loss or damage to property onboard our rigs and losses relating to terrorist acts or strikes.
If we are unable to obtain or maintain adequate insurance at rates and with deductibles or retention amounts that we consider commercially reasonable, we may choose to forgo insurance coverage and retain the associated risk of loss or damage.
If a significant accident or other event occurs and is not fully covered by insurance or contractual indemnity (or if our contractual indemnity is not enforceable under applicable law or our clients are unable to meet their indemnification obligation), it could adversely affect our financial position, operating results or cash flows.
The potential for U.S. Gulf of Mexico hurricane related windstorm damage or liabilities could result in uninsured losses and may cause us to alter our operating procedures during hurricane season.
Certain areas of the world such as the U.S. Gulf of Mexico experience hurricanes or similar extreme weather conditions on a relatively frequent basis. Some of our drilling rigs in the U.S. Gulf of Mexico are located in areas that could cause them to be susceptible to damage and/or total loss by these storms, and we have a larger concentration of jack-up rigs in the U.S. Gulf of Mexico than most of our competitors. We had four jackup rigs and four floaters in the U.S. Gulf of Mexico as of December 31, 2020. Damage caused by high winds and turbulent seas could result in rig loss or damage, termination of drilling contracts for lost or severely damaged rigs or curtailment of operations on damaged drilling rigs with reduced or suspended day rates for significant periods of time until the damage can be repaired. Moreover, even if our drilling rigs are not directly damaged by such storms, we may experience disruptions in our operations due to damage to our customers' platforms and other related facilities in the area. Our drilling operations in the U.S. Gulf of Mexico have been impacted by hurricanes in the past, including the total loss of drilling rigs, with associated losses of contract revenues and potential liabilities.
Insurance companies incurred substantial losses in the offshore drilling, exploration and production industries as a consequence of hurricanes that occurred in the U.S. Gulf of Mexico during 2004, 2005 and 2008. Accordingly, insurance companies have substantially reduced the nature and amount of insurance coverage available for losses arising from named tropical storm or hurricane damage in the U.S. Gulf of Mexico and have dramatically increased the cost of available windstorm coverage. The tight insurance market not only applies to coverage related to U.S. Gulf of Mexico windstorm damage or loss of our drilling rigs, but also impacts coverage for any potential liabilities to third parties associated with property damage, personal injury or death and environmental liabilities, as well as coverage for removal of wreckage and debris associated with hurricane losses. It is likely that the tight insurance market for windstorm damage, liabilities and removal of wreckage and debris will continue into the foreseeable future.
We have not purchased windstorm insurance for hull and machinery losses to our floaters arising from windstorm damage in the U.S. Gulf of Mexico due to the significant premium, high deductible and limited coverage for windstorm damage. We believe it is no longer customary for drilling contractors with similar size and fleet composition to purchase windstorm insurance for rigs in the U.S. Gulf of Mexico for the aforementioned reasons. Accordingly, we have retained the risk of loss or damage for our jackups and floaters arising from windstorm damage in the U.S. Gulf of Mexico.
We have established operational procedures designed to mitigate risk to our jackups in the U.S. Gulf of Mexico during hurricane season, and these procedures may, on occasion, result in a decision to decline to operate on a customer-designated location during hurricane season notwithstanding that the location, water depth and other standard operating conditions are within a rig's normal operating range. Our procedures and the associated regulatory requirements addressing drilling rig operations in the U.S. Gulf of Mexico during hurricane season, coupled with our decision to retain (self-insure) certain windstorm-related risks, may result in a significant reduction in the utilization of our jackups in the U.S. Gulf of Mexico.
Our annual insurance policies are up for renewal effective May 31, 2021, and any retained exposures for property loss or damage and wreckage and debris removal or other liabilities associated with U.S. Gulf of Mexico tropical storms or hurricanes may have a material adverse effect on our financial position, operating results or cash flows if we sustain significant uninsured or underinsured losses or liabilities as a result of these storms or hurricanes.
Our drilling contracts with national oil companies may expose us to greater risks than we normally assume in drilling contracts with non-governmental customers.
We currently own and operate ten rigs that are contracted with national oil companies. The terms of these contracts are often non-negotiable and may expose us to greater commercial, political and operational risks than we assume in other contracts, such as exposure to materially greater environmental liability, personal injury and other claims for damages (including consequential damages), or the risk that the contract may be terminated by our customer without cause on short-term notice, contractually or by governmental action, under certain conditions that may not provide us with an early termination payment. We can provide no assurance that the increased risk exposure will not have an adverse impact on our future operations or that we will not increase the number of rigs contracted to national oil companies with commensurate additional contractual risks.
Geopolitical events and violence could affect the markets for our services and have a material adverse effect on our business and cost and availability of insurance.
Geopolitical events have resulted in military actions, terrorist, pirate and other armed attacks, civil unrest, political demonstrations, mass strikes and government responses. Military action by the United States or other nations could escalate, and acts of terrorism, piracy, kidnapping, extortion, acts of war, violence, civil war or general disorder may initiate or continue. Such acts could be directed against companies such as ours. Such developments have caused instability in the world’s financial and insurance markets in the past. In addition, these developments could lead to increased volatility in prices for oil and natural gas and could affect the markets for our services, particularly to the extent that such events take place in regions with significant oil and natural gas reserves, refining facilities or transportation infrastructure, such as the Persian Gulf area. Insurance premiums could increase and coverage for these kinds of events may be unavailable in the future. Any or all of these effects could have a material adverse effect on our financial position, operating results or cash flows.
Rig construction, upgrade, enhancement and reactivation projects are subject to risks, including delays and cost overruns, which could have a material adverse effect on our financial position, operating results or cash flows.
We currently have two ultra-deepwater drillships under construction. In the future, we may construct additional rigs and continue to upgrade the capability and extend the service lives of our existing rigs. As a result of current market conditions, we may seek to delay delivery of our rigs under construction. During the third quarter of 2019, we entered into amendments to our construction agreements with the shipyard for the VALARIS DS-13 and VALARIS DS-14 rigs to provide for two-year extensions of the delivery date of each rig into 2021 and 2022, respectively. On December 30, 2020, we reached an agreement in principle to amend and assume pursuant to section 365 of the Bankruptcy Code the two construction agreements, which was subsequently modified through further negotiations. On February 26, 2021, we entered into amended agreements that extend the delivery date for both new rigs to December 31, 2023. During periods of heightened rig construction projects, shipyards and third-party equipment vendors may be under significant resource constraints to meet delivery obligations. Such
constraints may lead to substantial delivery and commissioning delays, equipment failures and/or quality deficiencies. Furthermore, new drilling rigs may face start-up or other operational complications following completion of construction, upgrades or maintenance. Other unexpected difficulties, including equipment failures, design or engineering problems, could result in significant downtime at reduced or zero day rates or the cancellation or termination of drilling contracts.
Rig construction, upgrade, life extension and repair projects are subject to the risks of delay or cost overruns inherent in any large construction project, including the following:
•failure of third-party equipment to meet quality and/or performance standards,
•delays in equipment deliveries or shipyard construction,
•shortages of materials or skilled labor,
•damage to shipyard facilities or construction work-in-progress, including damage resulting from fire, explosion, flooding, severe weather, terrorism, war or other armed hostilities,
•unforeseen design or engineering problems, including those relating to the commissioning of newly designed equipment,
•unanticipated actual or purported change orders,
•strikes, labor disputes or work stoppages,
•financial or operating difficulties of equipment vendors or the shipyard while constructing, enhancing, upgrading, improving or repairing a rig or rigs,
•unanticipated cost increases,
•foreign currency exchange rate fluctuations impacting overall cost,
•inability to obtain the requisite permits or approvals,
•client acceptance delays,
•disputes with shipyards and suppliers,
•latent damages or deterioration to hull, equipment and machinery in excess of engineering estimates and assumptions,
•claims of force majeure events, and
•additional risks inherent to shipyard projects in a non-U.S. location.
With respect to VALARIS DS-13 and VALARIS DS-14, if we were to secure contracts for these rigs, we would be subject to the risk of delays and other hazards impacting the viability of such contracts, which could have a material adverse effect on our financial position, operating results or cash flows.
In addition, we believe the costs required to reactivate a stacked rig and return the rig to drilling service are significant. Depending on the length of time that a rig has been stacked, we may incur significant costs to restore the rig to drilling capability, which may also include capital expenditures due to the possible technological obsolescence of the rig. In the future, market conditions may not justify these expenditures or enable us to operate our older rigs profitably during the remainder of their economic lives. We can provide no assurance that we will have access to adequate or economical sources of capital to fund the return of stacked rigs to drilling service.
Failure to recruit and retain skilled personnel could adversely affect our business.
We require skilled personnel to operate our drilling rigs and to provide technical services and support for
our business. Historically, competition for the labor required for drilling operations and construction projects was intense as the number of rigs activated, added to worldwide fleets or under construction increased, leading to shortages of qualified personnel in the industry. During such periods of intensified competition, it is more difficult and costly to recruit and retain qualified employees, especially in foreign countries that require a certain percentage of national employees. The recent prolonged industry downturn and reductions in offshore personnel wages may further reduce the number of qualified personnel available. If competition for labor were to intensify in the future, we could experience an increase in operating expenses, with a resulting reduction in net income, and our ability to fully staff and operate our rigs could be negatively affected.
We may be required to maintain or increase existing levels of compensation to retain our skilled workforce, especially if our competitors raise their wage rates. We also are subject to potential legislative or regulatory action that may impact working conditions, paid time off or other conditions of employment. These conditions could further increase our costs or limit our ability to fully staff and operate our rigs.
We have historically made substantial capital expenditures to maintain our fleet to comply with laws and the applicable regulations and standards of governmental authorities and organizations, or to expand our fleet, and we may be required to make significant capital expenditures to maintain our competitiveness.
We have historically made substantial capital expenditures to maintain our fleet. These expenditures could increase as a result of changes in:
•offshore drilling technology,
•the cost of labor and materials,
•customer requirements,
•fleet size,
•the cost of replacement parts for existing drilling rigs,
•the geographic location of the drilling rigs,
•length of drilling contracts,
•governmental regulations and maritime self-regulatory organization and technical standards relating to safety, security or the environment, and
•industry standards.
Changes in offshore drilling technology, customer requirements for new or upgraded equipment and competition within our industry may require us to make significant capital expenditures in order to maintain our competitiveness. In addition, changes in governmental regulations relating to safety or equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations, may require us to make additional unforeseen capital expenditures. As a result, we may be required to take our rigs out of service for extended periods of time, with corresponding losses of revenues, in order to make such alterations or to add such equipment. In the future, market conditions may not justify these expenditures or enable us to operate our older rigs profitably during the remainder of their economic useful lives.
Additionally, in order to expand our fleet, we may require additional capital in the future. If we are unable to fund capital with cash flows from operations or proceeds from sales of non-core assets, we may be required to either incur additional borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial condition at the time, by changes in laws and regulations (or
interpretation thereof) and by adverse market conditions resulting from, among others, general economic conditions, contingencies and uncertainties that are beyond our control. Similarly, when lenders and institutional investors reduce, and in some cases cease to provide, funding to industry borrowers, the liquidity and financial condition of us and our customers can be adversely impacted. If we raise funds by issuing equity securities, existing shareholders may experience dilution. Our failure to obtain the funds for necessary future capital expenditures could have a material adverse effect on our business and on our financial position, operating results or cash flows.
Unionization efforts and labor regulations in certain countries in which we operate could materially increase our costs or limit our flexibility.
Outside of the U.S., we are often subject to collective bargaining agreements that require periodic salary negotiations, which usually result in higher personnel expenses and other benefits. Efforts have been made from time to time to unionize other portions of our workforce. In addition, we have been subjected to strikes or work stoppages and other labor disruptions in certain countries. Additional unionization efforts, new collective bargaining agreements or work stoppages could materially increase our costs, reduce our revenues or limit our flexibility.
Certain legal obligations require us to contribute certain amounts to retirement funds or other benefit plans and restrict our ability to dismiss employees. Future regulations or court interpretations established in the countries in which we conduct our operations could increase our costs and materially adversely affect our business, financial position, operating results or cash flows.
Significant part or equipment shortages, supplier capacity constraints, supplier production disruptions, supplier quality and sourcing issues or price increases could increase our operating costs, decrease our revenues and adversely impact our operations.
Our reliance on third-party suppliers, manufacturers and service providers to secure equipment, parts, components and sub-systems used in our operations exposes us to potential volatility in the quality, prices and availability of such items. Certain high-specification parts and equipment that we use in our operations may be available only from a small number of suppliers, manufacturers or service providers, or in some cases must be sourced through a single supplier, manufacturer or service provider. Recent deterioration in the business environment has reduced the number of available suppliers, and the imposition of further public health measures affecting supply chain and logistics due to the COVID-19 pandemic may negatively impact our suppliers. Additionally, the longer that our Chapter 11 Cases continue, the more likely it is that our suppliers will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships. A disruption in the deliveries from such third-party suppliers, manufacturers or service providers, capacity constraints, production disruptions, price increases, quality control issues, recalls or other decreased availability of parts and equipment could adversely affect our ability to meet our commitments to customers, thus adversely impacting our operations and revenues and/or our operating costs.
Our long-term contracts are subject to the risk of cost increases, which could adversely impact our profitability.
In general, our costs increase as the demand for contract drilling services and skilled labor increases.increase, which may materially adversely affect our financial position, operating results or cash flows. Our long-term contracts are subject to inflationary factors such as increases in skilled labor costs, material costs and overhead costs. While some of our contracts include cost escalation provisions that allow changes to our day rate based on stipulated cost increases or decreases, the timing and amount earned from these day rate adjustments may differ from our actual increase in costs and many contracts do not allow for such day rate adjustments. During times of reduced demand, reductions in costs may not be immediate as portions of the crew may be required to prepare our rigs for stacking, after which time the crew members are assigned to active rigs or dismissed. Moreover, as our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. In general, labor costs increase primarily due to higher salary levels in a particular geographic location and inflation. Equipment maintenance expenses fluctuate depending upon the type of activity a drilling rig is performing and the age and condition of the equipment.equipment, as well as the impact of supply chain disruptions and inflation on the costs of parts and materials. Contract preparation expenses vary based on the scope and length of contract preparation required.
Our network and systems, including rig operating systems and critical data, are subject to cybersecurity risk and technical disruptions.
Our business depends on technologies, systems and networks, including both operational technology and information technology (“IT”), to conduct our offshore operations and help run our financial and onshore operations functions, including the collection of payments from customers, payments to vendors and employees and storage of company records. Some of these systems are managed or provided by third-party service providers, including cloud platform or cloud software providers.
Our information
Cybersecurity incidents, including unauthorized access, social engineering (including phishing), malware (including ransomware), distributed denial-of-service attacks, identity compromise and technical disruptions could materially impact our IT and operational technology systems, including rig operating systems, are subject to cybersecurity risks and threats.
We depend on technologies,critical systems and networks to conductinfrastructure, and our offshore and onshore operations, to collect payments from customers and to pay vendors and employees. Despitedata, as well as impact our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.third-party service providers on whom we rely. The risks associated with the failure of our systems and cyber incidents and attacks on our information technology systems could include disruptions of certain systems on our rigs; other impairments of our ability to conduct our operations;operations, including disruptions in our ability to make or receive payments and financial and onshore operating functions, loss of intellectual property, proprietary information, or customer and vendor data or other sensitive information; corruption or unauthorized release of our or our customer’s critical data; disruption of our or our customers'customers’ operations; and increased costs to prevent, respond to or mitigate cybersecurity events. Our business operations could be materially impacted by an incident or interruption of systems we rely on that originates from, or compromises, third‐party networks or devices, including those of our third‐party service providers. Any such breachincident or attack could result in injury to people, loss of control of, or damage to, our, (oror our customer's)customer’s, assets, downtime, and loss of revenue or harm to the environment. Any such breachincident or attack could also compromise our networks or our customers'customers’ and vendors'vendors’ networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in significant fines, civil and/or criminal claims or proceedings, including underproceedings.
Laws and regulations governing cybersecurity and data privacy and the unauthorized disclosure of confidential or protected information pose increasingly complex compliance challenges and potential costs, and any failure to comply with these data cybersecurity and privacy requirements or other applicable laws and regulations such as the European Union General Data Protection Regulationin this area could result in significant regulatory or other penalties and with effect from January 1, 2021, such regulation as amended and forming part of the law of the United Kingdom, disruptionlegal liability. Disruption to our operations and damage to our reputation which could materially adversely affect our financial position, operating results or cash flows. In
There can also be no assurance that our efforts, or the past,efforts of our partners and vendors, to invest in the protection of information technology infrastructure and data will prevent or identify incidents in our systems. While we have experienced data security breaches resultinga cybersecurity program and incident response plan in place to prepare for, detect, respond to, mitigate and recover from unauthorized access to our systems, which to date have not had a materialthe impact on our operations; however,of these attacks, cyber-attacks may leverage previously unknown vulnerabilities, sophisticated new techniques and emerging technologies and, there can be no assurance that such impactsour response will not be successful or effectively address the incident on a timely basis. As a result of a cybersecurity incident, we could suffer interruptions in our ability to manage our operations, which may materially adversely affect our business and financial results. In addition, we may incur large expenditures to investigate or remediate, to recover data, to repair or replace networks or information systems, or to protect against similar future events. Regardless of the specific nature of a cybersecurity incident, we could experience material in the future.operational impact, financial loss, legal liability, regulatory violations or reputational harm.
Risk RelatedRig reactivation, upgrade and enhancement projects are subject to Our Indebtednessrisks, including delays and Ordinary Sharescost overruns, which could materially adversely affect our financial position, operating results or cash flows.
Our Class A ordinary shares have been delisted fromThe costs required to reactivate a stacked rig and return the NYSE.
Effective September 14, 2020, our Class A ordinary shares were delisted from the NYSE. Since August 19, 2020, our shares have been tradedrig to drilling service are significant. Depending on the OTC Pink Open Market underlength of time that a rig has been stacked, we may incur significant costs to restore the symbol “VALPQ.”rig to drilling capability, which may also include capital expenditures due to, among other things, technological obsolescence or an equipment overhaul of the rig. Stacked drilling rigs require expenditures to return these rigs to drilling service. In the future, market conditions may not justify these types of expenditures or enable us to operate our rigs profitably during the remainder of their economic lives. In addition, we may not recover the expenditures incurred to reactivate rigs through the associated drilling contract or otherwise. We can provide no assurance that we will have access to adequate or economical sources of capital to fund the return of stacked rigs to drilling service.
During periods of increased rig reactivation, upgrade and enhancement projects, shipyards and third-party equipment vendors may be under significant resource constraints to meet delivery obligations. Such constraints may lead to substantial delivery and commissioning delays, equipment failures and/or quality deficiencies. Furthermore, drilling rigs may face start-up or other operational complications following completion of upgrades or maintenance. Other unexpected difficulties, including equipment failures, design or engineering problems, could result in significant downtime at reduced or zero day rates or the cancellation or termination of drilling contracts.
Rig reactivation, upgrade, life extension and repair projects are subject to the risks of delay or cost overruns, including the following: failure of third-party equipment to meet quality and/or performance standards, delays in equipment deliveries or shipyard construction, shortages of materials or skilled labor, disruptions occurring as the result of pandemics and/or epidemics and related public health measures implemented by governments worldwide, damage to shipyard facilities, including damage resulting from fire, explosion, flooding, severe weather, terrorism, war or other armed hostilities, unforeseen design or engineering problems, including those relating to the commissioning of newly designed equipment, unanticipated actual or purported change orders, strikes, labor disputes or work stoppages, financial or operating difficulties of equipment vendors or the shipyard while enhancing, upgrading, improving or repairing a rig or rigs, unanticipated cost increases, foreign currency exchange rate fluctuations impacting overall cost, inability to obtain the requisite permits or approvals, client acceptance delays, disputes with shipyards and suppliers, latent damages or deterioration to hull, equipment and machinery in excess of engineering estimates and assumptions, claims of force majeure events, and additional risks inherent to shipyard projects in a non-U.S. location. These risks could result in the cancellation or termination of drilling contracts for which the drilling rig was contracted or reduce the likelihood that such drilling rigs will receive a drilling contract if not already contracted.
We make significant expenditures to meet customer requirements, maintain our ordinary sharesfleet to comply with laws and the applicable regulations and standards of governmental authorities and organizations, or to expand our fleet, and we may be required to make significant expenditures to maintain our competitiveness.
We make substantial expenditures to maintain our fleet. These expenditures could increase as a result of changes in offshore drilling technology, the cost of labor and materials, customer requirements, fleet size, the cost of replacement parts for existing drilling rigs, the geographic location of the drilling rigs, length of drilling contracts, governmental regulations, maritime regulations and technical standards relating to safety, security or the environment, and industry standards.
Changes in offshore drilling technology, customer requirements for new or upgraded equipment, and competition within our industry may require us to make significant capital expenditures. In addition, changes in governmental regulations relating to decarbonization, environmental, emissions, safety or equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations, may require us to make additional unforeseen capital expenditures. In addition, commitments made by us, or our customers, to reduce emissions, or decarbonize, may require us to upgrade or retrofit our drilling rigs with additional equipment, less carbon intensive equipment or instrumentation. As a result, we may be required to take our drilling rigs out of service for extended periods of time, with corresponding losses of revenues, in order to make such alterations or to add such equipment. In the future, market conditions may not justify these expenditures or enable us to operate our drilling rigs profitably during the remainder of their economic useful lives.
Additionally, in order to expand our fleet, we may require additional capital in the future. If we are unable to fund capital requirements with cash flows from operations or proceeds from sales of non-core assets, we may be required to either incur additional borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial condition at the time, by restrictive covenants in our debt agreements, bye-laws and regulations and by adverse market conditions resulting from, among others, general economic conditions, contingencies and uncertainties that are beyond our control. Similarly, when lenders and institutional investors reduce, and in some cases cease to provide, funding to industry borrowers, the liquidity and financial condition of us and our customers can be adversely impacted. If we raise funds by issuing equity securities, existing shareholders may experience dilution, and if we raise funds by issuing additional debt securities,
we may have to pledge additional assets as collateral. Our failure to obtain the funds for necessary future capital expenditures could materially adversely affect our business and on our financial position, operating results or cash flows.
Failure to recruit and retain skilled personnel could materially adversely affect our business.
We require skilled personnel to operate our drilling rigs and to provide technical services and support for our business, and further rig reactivations will require that we hire additional skilled personnel. As demand for our services and the number of active drilling rigs has increased, competition for the labor required for drilling operations and construction projects has intensified, leading to shortages of qualified personnel in the industry. During periods of intensified competition, it is more difficult and costly to recruit, train and retain qualified employees, including in foreign countries that require a certain percentage of national employees. The most recent prolonged industry downturn and resulting reductions in offshore personnel wages further reduced the number of qualified personnel available. Hiring qualified and experienced personnel with the specialized skills and qualifications required to operate an offshore drilling rig is difficult due to the competitive labor market and lack of experience. In the current environment where competition for labor is intense, we may be required to increase existing levels of compensation to stay competitive in retaining a skilled workforce.
In addition, new personnel that we hire may need to undergo training to develop the skills needed to perform their job duties. There can be no assurance that our training programs will be adequate for these purposes, which could expose us to operational hazards and risks. We may also incur additional training costs to ensure that new or promoted personnel have the right skills and qualifications.
We also are subject to potential legislative or regulatory action that may impact working conditions, paid time off or other conditions of employment, including mandated vaccination programs. These conditions could further increase our costs or limit our ability to fully staff and operate our drilling rigs.
The increases in employment costs cause an increase in operating expenses, with a resulting reduction in net income, and our ability to fully staff and operate our drilling rigs may be negatively affected.
Our shared service center may not create the operational efficiencies that we expect and may create risks relating to the processing of transactions and recording of financial information, which could materially adversely affect our financial condition, operating results or cash flows.
We have implemented a shared service center program pursuant to which we have outsourced certain finance, human resources, supply chain and IT functions. We have and will continue to trade onalign the design and operation of our financial control environment as part of our shared service center program. As part of this market, whether broker-dealersprogram, we are outsourcing, and will continue to provide public quotesoutsource, certain accounting, payroll, human resources, supply chain and IT functions to a third-party service provider. The party that we utilize for these services may not be able to handle the volume of activity or perform the quality of service necessary to support our operations. The failure of the third-party to fulfill its obligations could disrupt our operations. In addition, the move to a shared service environment, including our reliance on a third-party provider, may create risks relating to the processing of transactions and recording of financial information. We could experience a lapse in the operation of internal controls due to turnover, lack of legacy knowledge, inappropriate training and use of a third-party provider, which could result in significant deficiencies or material weaknesses in our internal control over financial reporting and materially adversely affect our financial position, operating results or cash flows.
We may not realize the expected benefits of our ordinary sharesARO joint venture.
ARO, our 50/50 unconsolidated ARO joint venture and a provider of offshore drilling services, faces many of the same risks as we face. Operating through ARO, in which we have a shared interest, may result in our having less control over many decisions made with respect to projects, operations, safety, utilization, internal controls and other operating and financial matters. ARO may not apply the same controls and policies that we follow to manage our risks, and ARO’s controls and policies may not be as effective. As a result, operational, financial and control issues may arise, which could materially adversely affect our financial position, operating results or cash flows. Additionally, in order to establish or preserve our relationship with our joint venture partner we may agree to risks and contributions of resources that are proportionately greater than the returns we could receive, which could reduce our income and return on this market, whether the trading volumeour investment in ARO compared to what we may traditionally require in other areas of our ordinary sharesbusiness.
ARO’s income and accounts receivable are concentrated with Saudi Aramco. The loss of this customer, or a substantial decrease in demand by this customer for ARO’s services, would have a material adverse effect on ARO’s business, results of operations and financial condition, which could materially adversely affect our financial position, operating results or cash flows.
We have issued a 10-year shareholder notes receivable to ARO (the “Notes Receivable from ARO”), which are governed by the laws of Saudi Arabia. In the event of a dispute with ARO over the repayment of the Notes Receivable from ARO, our ability to enforce the payment obligations of ARO or to exercise other remedies are subject to several significant limitations, including that our ability to accelerate outstanding amounts under the Notes Receivable from ARO is subject to the consent of Saudi Aramco and that the Notes Receivable from ARO are governed by the laws of Saudi Arabia, and we are limited to the remedies available under Saudi law. In addition, our Notes Receivable from ARO are subordinated and junior in right of payment to ARO’s term loan described below, and as such, we may not be repaid the interest or principal amounts of the Notes Receivable from ARO.
We have a potential obligation to fund ARO for newbuild jackup rigs. The shareholder agreement governing the joint venture (the "Shareholder Agreement") specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. The first two newbuild jackups were ordered in January 2020. The first rig, Kingdom 1, was delivered in the fourth quarter of 2023 and the second is expected to be delivered in the first half of 2024. ARO is expected to commit to orders for two additional newbuild jackups in the near term. There can be no assurance that the new jackup rigs will begin operations as anticipated.
The joint venture partners intend for the newbuild jackup rigs to be financed out of ARO's available cash on hand or from operations and/or funds available from third-party financing. In October 2023, ARO entered into a $359.0 million term loan to finance the remaining payments due upon delivery of the first two newbuild jackups and for general corporate purposes. Further, in the event ARO has insufficient cash or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. Beginning with the delivery of the second newbuild, each partner's commitment shall be reduced by the lesser of the actual cost of each newbuild rig, or $250.0 million, on a proportionate basis. Any required capital contributions we make could negatively impact our liquidity position and financial condition.
As a result of these risks, it may take longer than expected for us to realize the expected returns on our investment in ARO or such returns may ultimately be less than anticipated. Additionally, if we are unable to make any required contributions, our ownership in ARO could be diluted which could hinder our ability to effectively manage ARO and could materially adversely affect our financial position, operating results or cash flows.
Joint venture investments could be adversely affected by our joint venture partners’ actions, financial condition and liquidity and disputes between us and our joint venture partners.
We have made investments in joint ventures other than ARO. Such investments are subject to the risk that the other shareholders of the joint venture, who may have different business or investment strategies than us or with whom we may have a disagreement or dispute, may have the ability to block business, financial, or management decisions (such as the decision to distribute dividends or appoint members of management), which may be crucial to the success of our investment in the joint venture, or could otherwise implement initiatives which may be contrary to our interests. Our partners may be unable, or unwilling, to fulfil their obligations under the relevant agreements regarding such joint ventures (for example by non-contributing working capital or other resources), or may experience financial, operational, or other difficulties that may adversely impact our investment in a particular joint venture. In addition, our partners may lack sufficient controls and procedures which could expose us to risk. If any of the foregoing were to occur, such occurrence could materially adversely affect our financial position, operating results or cash flows.
We may pursue other joint ventures that we believe will enable us to further expand or enhance our business. Any such joint venture would be evaluated on a case-by-case basis, and its consummation would depend upon numerous factors, including identifying suitable opportunities that align with our business strategy, reaching agreement with the potential counterparty on acceptable terms, the receipt of any applicable regulatory and other approvals, and other conditions. Any such joint venture would involve various risks, including among others (1) difficulties related to integrating or managing applicable parts of a joint venture and unanticipated changes in customer and other third-party relationships subsequent to closing, (2) diversion of management’s attention from day-to-day operations, (3) failure to realize anticipated benefits, such as cost savings, revenue enhancements or business synergies, (4) the potential for substantial transaction expenses and (5) potential accounting impairment or actual diminution or loss of value of our investment if future market, business or other conditions ultimately differ from our assumptions at the time any such transaction is consummated.
Our business involves operating hazards, and our insurance and indemnities from our customers may not be adequate to cover any potential losses.
The drilling of oil and natural gas wells involves numerous operating hazards, such as blowouts, reservoir damage, loss of production, loss of well control, uncontrolled formation pressures, lost or stuck drill strings, equipment failures and mechanical breakdowns, punch throughs, craterings, industrial accidents, fires, explosions, oil spills and pollution. Contract drilling requires the use of heavy equipment and exposure to hazardous conditions, which may subject us to liability claims by employees, customers and other parties or prosecution by governmental authorities. These hazards can cause personal injury or loss of life, severe damage to, or destruction of, property and equipment, pollution or environmental damage, which could lead to claims by employees, contractors or third parties and suspension of operations and contract terminations. Our drilling rigs are also subject to hazards associated with marine operations, either while docked, on site or during mobilization, such as capsizing, breaking free of moorings, sinking, grounding, collision, piracy, damage from adverse weather and marine life infestations. The U.S. Gulf of Mexico and the coasts of Australia are areas subject to hurricanes, typhoons and other adverse weather conditions, and our drilling rigs in these regions may be exposed to damage or a total loss by these storms, some of which may not be covered by insurance. The occurrence of these events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury to or death of rig personnel. Operations may also be suspended because of machinery breakdowns, abnormal drilling conditions, failure of subcontractors to perform or supply goods or services or personnel shortages. Damage to the environment could also result from our operations, particularly through spillage of hydrocarbons, fuel, lubricants or other chemicals and substances used in drilling operations or fires. We may also be subject to property damage, environmental indemnity and other claims by third parties. Drilling involves certain risks associated with the loss of control of a well, such as blowout, cratering, the cost to regain control of or redrill the well and remediation of associated pollution. Our customers may be unable or unwilling to indemnify us against such risks. In addition, a court may decide that certain indemnities in our current or future drilling contracts are not enforceable. The law generally
considers contractual indemnity for criminal fines and penalties to be against public policy, and the enforceability of an indemnity as to other matters may be limited.
Our insurance policies and drilling contracts contain rights to indemnity that may not adequately cover our losses, and we do not have insurance coverage or rights to indemnity for all risks. We have two main types of insurance coverage: (1) hull and machinery coverage for physical damage to our property and equipment and (2) excess liability coverage, which generally covers our liabilities arising from our operations, such as personal injury and property claims, including wreck removal and pollution. We have no hull and machinery insurance coverage for damages caused by named storms in the U.S. Gulf of Mexico for our jack-up fleet and only limited coverage for our floater fleet. We also retain the risk for any liability that exceeds our excess liability coverage. Pollution and environmental risks generally are not completely insurable.
If a significant accident or other event occurs that is not fully covered by our insurance or by an enforceable or recoverable indemnity, the occurrence could materially adversely affect our financial position, operating results or cash flows. The amount of our insurance may also be less than the related impact on enterprise value after a loss. Our insurance coverage will not in all situations provide sufficient funds to protect us from all liabilities that could result from our drilling operations. Our coverage includes annual aggregate policy limits. As a result, we generally retain the risk for any losses in excess of these limits. We currently only carry limited insurance for loss of hire for several of our rigs, and certain other claims may also not be reimbursed, in part or full, by insurance carriers. Any such lack of reimbursement may cause us to incur substantial costs. In addition, we could decide to retain more risk in the future, resulting in higher risk of losses, which could be material. Moreover, we may not be able to maintain adequate insurance in the future at rates that we consider reasonable or be able to obtain insurance against certain risks. Furthermore, our insurance carriers may assert that our insurance policies do not provide coverage for our losses. Our insurance policies also have exclusions of coverage for some losses. Uninsured exposures may include radiation hazards, loss of hire and losses relating to terrorist acts or strikes and some cyber events.As a result of increased costs to insurance companies due to regulatory, geopolitical, reputational or other developments, insurance companies that have historically participated in underwriting risks arising out of oil and natural gas operations may discontinue that practice, may reduce the insurance capacity they are willing to deploy or demand significantly higher premiums or deductibles to cover these risks. Additionally, a significant number of high cost climate-related insurance claims or natural catastrophes such as hurricanes, floods or windstorms may result in withdrawal of insurance capacity and increasing premiums to oil and natural gas industry companies.
Geopolitical events and violence could materially adversely affect the markets for our services and have a material adverse effect on our business and cost and availability of insurance.
Geopolitical events have resulted in military actions, terrorist, pirate and other armed attacks, civil unrest, political demonstrations, mass strikes and government responses to such events. Military action by the U.S. or other nations could escalate, and acts of terrorism, piracy, kidnapping, extortion, acts of war, violence, civil war or general disorder may initiate or continue. Such acts could be directed against us or our assets. Such developments have caused instability in the world’s financial and insurance markets in the past. In addition, these developments could lead to increased volatility in prices for oil and natural gas and could materially adversely affect the markets for our services, particularly to the extent that such events take place in regions with significant oil and natural gas reserves, refining facilities or transportation infrastructure. For example, the ongoing conflicts, and the continuation of, or any increase in the severity of, the conflicts in Ukraine and the Middle East, has led and may continue to lead to an increase in the volatility of global oil and natural gas prices. Insurance premiums could increase and coverage for these kinds of events may be unavailable in the future. Any or all of these effects could materially adversely affect our financial position, operating results or cash flows.
Our drilling contracts with national oil companies may expose us to greater risks than we normally assume in drilling contracts with non-governmental customers.
We currently own and operate 13 drilling rigs that are contracted with national oil companies. The terms of these contracts are often non-negotiable and may expose us to greater commercial, political and operational risks than we assume in other contracts, such as exposure to materially greater environmental liability, personal injury and other claims for damages (including consequential damages), or, in certain cases, the risk of early termination of the contract for convenience (without cause), exercisable upon advance notice to us, contractually or by governmental action, without making an early termination payment to us. We can provide no assurance that the increased risk exposure will not have an adverse impact on our future operations or that we will not increase the number of drilling rigs contracted to national oil companies with commensurate additional contractual risks.
The impact and effects of public health crises, pandemics and epidemics could have a material adverse effect on our business, financial condition and results of operations.
Public health crises, pandemics and epidemics and fear of such events may adversely impact our operations, the operations of our customers and the global economy, including the worldwide demand for oil and natural gas and the level of demand for our services. Other effects of such public health crises, pandemics and epidemics may include significant volatility and disruption of the global financial markets; continued volatility of crude oil prices and related uncertainties around OPEC+ production; disruption of our operations, including suspension of drilling activities; impact to costs; loss of workers; labor shortages; supply chain disruptions or equipment shortages; logistics constraints; customer demand for our services and industry demand generally; capital spending by oil and natural gas companies; our liquidity; the price of our securities and trading markets with respect thereto; our ability to access capital markets; asset impairments and other accounting changes; certain of our customers experiencing bankruptcy or otherwise becoming unable to pay vendors, including us; and employee impacts from illness, travel restrictions, including border closures and other community response measures. Such public health crises, pandemics and epidemics are continuously evolving and the extent to which our business operations and financial results may be affected depends on various factors beyond our control, such as the duration, severity and sustained geographic resurgence of public health crises, pandemics and epidemics; the impact and effectiveness of governmental actions to contain and treat such outbreaks, including government policies and restrictions; vaccine hesitancy, vaccine mandates, and voluntary or mandatory quarantines; and the global response surrounding such uncertainties.
Unionization efforts and labor regulations in certain countries in which we operate could materially increase our costs or limit our flexibility with regard to the management of our personnel.
Outside of the U.S., we are often subject to collective bargaining agreements that require periodic salary negotiations, which usually result in higher personnel expenses and other benefits. Efforts have been made from time to time to unionize other portions of our workforce. In addition, we have been subjected to strikes or work stoppages and other labor disruptions in certain countries. Additional unionization efforts, new collective bargaining agreements or work stoppages could materially increase our costs, reduce our profitability or limit our flexibility.
Certain legal obligations require us to contribute certain amounts to retirement funds or other benefit plans and restrict our ability to dismiss employees. Future regulations or court interpretations established in the countries in which we conduct our operations could increase our costs and materially adversely affect our financial position, operating results or cash flows.
Significant equipment or part shortages, supplier capacity constraints, supplier production disruptions, supplier quality and sourcing issues or price increases could materially adversely affect our financial position, operating results or cash flows.
Our reliance on third-party suppliers, manufacturers and service providers to secure equipment, parts, components and sub-systems used in our operations exposes us to potential volatility in the quality, prices and availability of such items. Certain high-specification parts and equipment that we use in our operations may be available only from a small number of suppliers, manufacturers or service providers, or in some cases must be sourced through a single supplier, manufacturer or service provider. Industry consolidation has reduced and may continue to reduce the number of available suppliers, and our suppliers have been and may continue to be impacted by supply chain and logistics disruptions that began during the COVID-19 pandemic. A disruption in the deliveries from such third-party suppliers, manufacturers or service providers, capacity constraints, production disruptions, price increases, including those related to inflation and supply chain disruption, quality control issues, recalls or other decreased availability of parts and equipment could adversely affect our ability to meet our commitments to customers by making it cost prohibitive to do so, thus adversely impacting our operations and revenues and/or our operating costs. Delays in the delivery of critical drilling equipment could cause delays in the expected timing of rig reactivation, enhancement or upgrade projects, unscheduled operational downtime, our drilling rigs to be unavailable within the commencement window established by the operator in the contract and subject us to potential termination of the contract for such late delivery of the drilling rig.
Our operating and maintenance costs will not necessarily fluctuate in proportion to changes in our operating revenues.
Our operating and maintenance costs will not necessarily be proportional to changes in our operating revenues. Operating costs are affected by many factors, including inflation, while maintenance costs depend on, among other factors, market conditions for drilling services as well as unplanned downtime events or idle periods between contracts. Costs for operating a rig are therefore generally not correlated to the day rate being earned. As our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. Equipment maintenance costs fluctuate depending upon the age and condition of the equipment, and these costs could increase for short or extended periods as a result of new regulatory or customer requirements. Any of the foregoing could impact our liquidity or may cause us to miss our financial guidance for a given period, which could adversely impact the market price for our Common Shares. In addition, certain of our drilling contracts are partially payable in local currency. The amounts, if any, of local currency received under these drilling contracts may exceed our local currency needs to pay local operating and maintenance costs, leading to an accumulation of excess local currency balances, which, in certain instances, may be subject to either restrictions or other difficulties in converting to U.S. dollars, our functional currency, or to other currencies of the locations where we operate. Excess amounts of local currency may also expose us to the risk of currency exchange losses.
Our ability to pay our operating and capital expenses and make payments due on our debt depends on many factors beyond our control.
Our ability to pay our operating and capital expenses and make payments due on our debt depends on our future performance, which will be affected by financial, business, economic, legislative and other factors, many of which are beyond our control. Our business may not generate sufficient to provide for an efficient trading market or whether quotes for our ordinary shares will continue on this marketcash flow from operations in the future, which could result in significantly lower trading volumesour being unable to fund liquidity needs or repay indebtedness. A range of economic, business and reduced liquidity for investorsindustry factors will affect our financial performance, and many of these factors, such as the condition of our industry, the global economy and initiatives of our competitors, are beyond our control. If we do not generate enough cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as selling assets; reducing or delaying capital investments; seeking to buyraise additional capital; or sellrestructuring or refinancing all or a portion of our ordinary shares.indebtedness at or before maturity.
The accounting method for our 2024 Convertible Notes could have a material effect on our reported financial results.
Based on our current plan of reorganization, we expect our 3.00% exchangeable senior notes due 2024 (the “2024 Convertible Notes”) to be cancelled with holders receiving the treatment as set forth in the plan of reorganization. However, to the extent the 2024 Convertible Notes (as defined below) are not cancelled, under U.S. GAAP, we must separately account for the liability and equity components of convertible debt instruments, such as our 2024 Convertible Notes in a manner that reflects the issuer’s economic interest cost. The equity component representing the conversion feature is recorded in additional paid-in capital within the shareholders’ equity section of our consolidated balance sheet. The equity component is not remeasured if we continue to meet certain conditions for equity classification under U.S. GAAP, including maintaining the ability to settle the 2024 Convertible Notes entirely in shares. During periods in which we are unable to meet the conditions for equity classification, the equity component or a portion thereof would be remeasured through earnings, which could adversely affect our operating results.
If the 2024 Convertible are not cancelled pursuant to our plan reorganization, upon conversion of the 2024 Convertible Notes, holders will receive cash, our Class A ordinary shares or a combination thereof, at our election. Our intent is to settle the principal amount of the 2024 Convertible Notes in cash upon conversion. If the conversion value exceeds the principal amount (i.e., our share price exceeds the exchange price on the date of conversion), we expect to deliver shares equal to our conversion obligation in excess of the principal amount. During each respective reporting period that our average share price exceeds the exchange price, an assumed number of shares required to
settle the conversion obligation in excess of the principal amountWe cannot be assured that we will be included inable to accomplish any of these alternatives on terms acceptable to us or at all. In addition, the denominator forterms of existing or future debt agreements may restrict us from adopting any of these alternatives. The failure to generate sufficient cash flow or to achieve any of these alternatives could materially adversely affect our computationability to fund liquidity needs or pay amounts due under our debt.
The agreements governing our debt, including the Indenture and the Credit Agreement, contain various covenants that impose restrictions on us and certain of
diluted earnings per share using the treasury stock method. If we are unableour subsidiaries that may affect our ability to
demonstrateoperate our
intentbusiness and to
settle the principal amount in cash, or are otherwise unable to utilize the treasury stock method, our diluted earnings per share would be adversely affected. See "Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional informationmake payments on our 2024 Convertible Notes.debt.
The Indenture, the Credit Agreement and the related agreements governing our indebtedness contain covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:
•incur additional debt and issue preferred stock;
•incur or create liens;
•redeem and/or prepay certain debt;
•pay dividends on our shares or repurchase shares;
•make certain investments;
•engage in specified sales of assets;
•enter into transactions with affiliates; and
•engage in consolidation, mergers and acquisitions.
TransfersIn addition, the Credit Agreement contains financial covenants requiring us to maintain (i) a minimum book value of equity to total assets ratio, (ii) a minimum interest coverage ratio and (iii) a minimum amount of liquidity. Any future indebtedness may also require us to comply with similar or other covenants. These restrictions on our Class A ordinary shares may be subjectability to stamp duty or stamp duty reserve tax (“SDRT”) in the U.K., which would increase the costoperate our business could seriously harm our business by, among other things, limiting our ability to take advantage of dealing in our Class A ordinary shares.financings, mergers, acquisitions and other business opportunities.
Stamp duty and/or SDRT are imposed in the U.K. on certain transfers of chargeable securities (which include shares in companies incorporated in the U.K.) at a rate of 0.5%Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the consideration paidcovenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity for the transfer. Certain transfersdebt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of sharesour obligations. In addition, the limitations imposed by financing agreements on our ability to depositary receipt facilitiesincur additional debt and to take other actions might significantly impair our ability to obtain other financing. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or clearance systems providers are charged at a higher rate of 1.5%.
Pursuant to arrangements that we entered into with the Depository Trust Company (“DTC”), our Class A ordinary shares are eligible to be held in book entry form through the facilities of DTC. Transfers of shares held in book entry form through DTC will not attract a charge to stamp duty or SDRT in the U.K. A transfer of the shares from within the DTC system out of DTC and any subsequent transfers that occur entirely outside the DTC system will attract a charge to stamp duty at a rate of 0.5% of any consideration, which is payable by the transferee of the shares. Any such duty must be paid (and the relevant transfer document stamped by Her Majesty's Revenue & Customs (“HMRC”)) before the transfer can be registered in the share register of Valaris plc. If a shareholder decides to redeposit shares into DTC, the redeposit will attract SDRT at a rate of 1.5% of the value of the shares.insolvent.
We have put in place arrangementsmay experience risks associated with our transfer agent to require that shares held in certificated form cannot be transferred into the DTC system until the transferorfuture mergers, acquisitions or dispositions of the shares has first delivered the shares to a depository specified by us so that SDRT may be collected in connection with the initial delivery to the depository. Any such shares will be evidenced by a receipt issued by the depository. Before the transfer can be registered in our share register, the transferor will also be required to provide the transfer agent sufficient funds to settle the resultant liability for SDRT, which will be charged at a rate of 1.5% of the value of the shares.businesses or assets or other strategic transactions.
Following decisionsWe may pursue mergers, acquisitions or dispositions of businesses or assets or other strategic transactions that we believe will strengthen, streamline or expand our business. Each such transaction would be dependent upon several factors, including identifying suitable companies, businesses or assets that align with our business strategies, reaching agreement with the European Courtpotential counterparties on acceptable terms, the receipt of Justiceany applicable regulatory and the U.K. First-tier Tax Tribunal, HMRC announcedother approvals, and other conditions. These transactions involve various risks, including among others, (1) difficulties related to integrating or managing applicable parts of an acquired business or joint venture and unanticipated changes in customer and other third-party relationships subsequent to closing, (2) diversion of management's attention from day-to-day operations, (3) applicable antitrust laws and other regulations that it would not seekmay limit our ability to apply a chargeacquire targets or require us to stamp dutydivest an acquired business or SDRT on the issuance of shares (or, where it is integralassets, (4) failure to the raising of new capital, the transfer of new shares) into a depositary receipt facility or clearance system provider,realize anticipated benefits, such as DTC. Further, in its 2017 Autumn Budget the U.K. government announced that it would not reintroduce the Stamp Duty and Stamp Duty Reserve Tax 1.5% charge on the issue of shares (and transfers integral to capital raising) into overseas clearance services and depositary receipt systems following the U.K.’s exit from the European Union. However, it is possible that the U.K. government may changecost savings, revenue enhancements or enact laws applicable to stamp dutystrengthening or SDRT, which could have a material effect on the cost of trading inbroadening our shares.
If our Class A ordinary shares are not eligible for continued deposit and clearing within the facilities of DTC, then transactions in our securities may be disrupted.
The facilities of DTC are widely-used for rapid electronic transfers of securities between participants within the DTC system, which include numerous major international financial institutions and brokerage firms. Currently, all trades of our Class A ordinary shares on the OTC Pink Open Market are cleared and settled on the facilities of DTC. Our Class A ordinary shares are, at present, eligible for deposit and clearing within the DTC system, pursuant to arrangements with DTC whereby DTC accepted our Class A ordinary shares for deposit, clearing and settlement services, and we agreed to indemnify DTC for any stamp duty and/or SDRT that may be assessed upon it as a result of its service as a clearance system provider for our Class A ordinary shares. However, DTC retains sole discretion to cease to act as a clearance system provider for our Class A ordinary shares at any time.
business, (5)
If DTC determinespotentially substantial transaction costs associated with acquisitions, joint ventures or investments if we or a transaction counterparty seeks to exit or terminate an interest in the joint venture or investment, and (6) potential accounting impairment or actual diminution or loss of value of our investment if future market, business or other conditions ultimately differ from our assumptions at the time such transaction is consummated.
Our actual financial results after emergence from bankruptcy may not be comparable to our projections filed with the Bankruptcy Court in the course of the Chapter 11 Cases.
In connection with the disclosure statement we filed with the Bankruptcy Court and the hearing to consider confirmation of the plan of reorganization, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the plan of reorganization and our ability to continue operations upon our emergence from the Chapter 11 Cases. Those projections were prepared solely for the purpose of the Chapter 11 Cases and have not been and will not be updated and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to then prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. We have not updated the projections prepared solely for the purpose of our Chapter 11 Cases or the assumptions on which they were based after our emergence. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks, and the assumptions underlying the projections or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections.
The exercise of all or any time thatnumber of outstanding warrants or the issuance or settlement of stock-based awards may dilute the holders of our shares are no longer eligibleCommon Shares.
On the Effective Date, we issued 75.0 million Common Shares and 5.6 million warrants to purchase 5.6 million Common Shares at an exercise price of $131.88 per share, exercisable for deposit, clearinga seven-year period commencing on the Effective Date. Additionally, on May 3, 2021, our board of directors approved and ratified the Valaris Limited 2021 Management Incentive Plan (the “MIP”) and reserved 9.0 million of our Common Shares for issuance under the MIP primarily for employees and directors. The grant and settlement services within its facilities, tradingof equity awards in such shares would be disrupted. In this event, DTC has agreed itthe future, any exercise of the warrants into Common Shares and any sale of Common Shares underlying outstanding warrants will provide us advance notice and assist us,have a dilutive effect to the extent possible, with efforts to mitigate adverse consequences. While we would pursue alternative arrangements to preserveholdings of our listingexisting shareholders and maintain trading, any such disruption could have a material adverse effect on the tradingmarket for our Common Shares, including the price of our Class A ordinary shares.that an investor could obtain for their Common Shares.
We have less flexibility as a U.K. public limited company with respect to certain aspects of capital management than U.S. corporations due to increased shareholder approval requirements.
Directors of Delaware and other U.S. corporations may issue, without further shareholder approval, shares of common stock authorized in their certificates of incorporation that were not already issued or reserved. The business corporation laws of Delaware and other U.S. states also provide substantial flexibility in establishing the terms of preferred stock. However, English law provides that a board of directors of a U.K. public limited company may only allot shares with the prior authorization of an ordinary resolution of the company’s shareholders, which authorization must state the maximum amount of shares that may be allotted under it and specify the date on which it will expire, which must not be more than five years from the date on which the shareholder resolution is passed. An ordinary resolution was passed by shareholders at our last annual general meeting on June 15, 2020 to authorize the allotment of up to a prescribed amount of additional shares until the conclusion of the next annual general meeting or the close of business on August 19, 2021 (whichever is earlier).
English law also generally provides shareholders pre-emption rights over new shares that are issued for cash. However, it is possible, where the board of directors is generally authorized to allot shares, to exclude pre-emption rights by a special resolution of the shareholders or by a provision in the articles of association. Such exclusion of pre-emption rights will commonly cease to have effect at the same time as the general allotment authority to which it relates is revoked or expires. If the general allotment authority is renewed, the authority excluding pre-emption rights may also be renewed by a special resolution of the shareholders. Two special resolutions were passed, in conjunction with an allotment authority at our last annual general meeting on June 15, 2020, to disapply pre-emption rights in respect of new shares up to a prescribed amount, both generally and in connection with an acquisition or specified capital investment, until the conclusion of the next annual general meeting or the close of business on August 19, 2021 (whichever is earlier).
Our shares are not traded on a “recognized investment exchange” for the purposes of English law and we are therefore only able to conduct “off-market” purchases of our shares. English law generally prohibits a company from repurchasing its own shares by way of "off-market" purchases without approval by ordinary resolution of the shareholders of the terms of the contract by which the purchase(s) is affected. Such approval may only last for a maximum period of five years after the date on which the resolution is passed. An ordinary resolution was passed at our annual shareholder meeting on May 21, 2018 authorizing us to make "off-market" purchases of our own shares pursuant to certain purchase agreements for a five-year term.
We can provide no assurances that future shareholder approvals required for the matters described above will be forthcoming. If all or any of such approvals are not granted, our flexibility with respect to certain capital management matters could be reduced which could, in turn, deprive our shareholders of substantial benefits.
Our articles of association contain anti-takeover provisions; however, the Company is not subject to the U.K.'s City Code on Takeovers and Mergers.
Certain provisions of our articles of association have anti-takeover effects, such as the ability to issue shares under the Rights Plan (as defined therein). These provisions are intended to ensure that any takeover or change of control of the Company is conducted in an orderly manner, all shareholders of the Company are treated equally and fairly and receive an optimum price for their shares and the long-term success of the Company is safeguarded. Under English law, it may not be possible to implement these provisions in all circumstances.
The Code only applies to an offer for a public company that is registered in the U.K. (or the Channel Islands or the Isle of Man) and the securities of which are not admitted to trading on a regulated market in the U.K. (or the Channel Islands or the Isle of Man) if the company is considered by the takeover panel (the "Takeover Panel") to have its place of central management and control in the U.K. (or the Channel Islands or the Isle of Man). This is known as the "residency test." The test for central management and control under the Code is different from that used by the U.K. tax authorities. Under the Code, the Takeover Panel will look to where the majority of the directors of the company are residents for the purposes of determining where the company has its place of central management and control. Accordingly, the Takeover Panel has previously indicated that the Code does not apply to the Company and the Company's shareholders therefore do not have the benefit of the protections the Code affords, including, but not limited to, the requirement that a person who acquires an interest in shares carrying 30% or more of the voting rights in the Company must make a cash offer to all other shareholders at the highest price paid in the 12 months before the offer was announced.
English law requires that we meet certain additional financial requirements before declaring dividends and returning funds to shareholders.
Under English law, we are only able to declare dividends and return funds to our shareholders out of the accumulated distributable reserves on our statutory balance sheet. Distributable reserves are a company’s accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. Realized profits are created through the remittance of profits of certain subsidiaries to our parent company in the form of dividends.
English law also provides that a public company can only make a distribution if, among other things (a) the amount of its net assets (that is, the total excess of assets over liabilities) is not less than the total of its called up share capital and non-distributable reserves and (b) if, and to the extent that, the distribution does not reduce the amount of its net assets to less than that total.
We may be unable to remit the profits of our subsidiaries in a timely or tax efficient manner. If at any time we do not have sufficient distributable reserves to declare and pay quarterly dividends, we may undertake a reduction in the capital of the Company, in addition to the reduction of capital undertaken in 2014, to reduce the amount of our share capital and non-distributable reserves and to create a corresponding increase in our distributable reserves out of which future distributions to shareholders can be made. To comply with English law, a reduction of capital would, in addition to the restrictions described above, be subject to (a) approval of shareholders at a general meeting by special resolution; (b) confirmation by an order of the English Courts and (c) the Court order being delivered to and registered by the Registrar of Companies in England. If we were to pursue a reduction of capital of the Company as a course of action, and failed to obtain the necessary approvals from shareholders and the English Courts, we may undertake other efforts to allow the Company to declare dividends and return funds to shareholders.
Regulatory, Legal Regulatory and Tax Risks
Failure to comply with anti-corruption and anti-bribery statutes, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, could result in fines, criminal penalties, drilling contract terminations and an adverse effect onmaterially adversely affect our business.financial position, operating results or cash flows.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption and are subject to the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”), the U.S. Treasury Department'sDepartment’s Office of Foreign Assets Control ("OFAC"(“OFAC”) regulations, the U.K. Bribery Act ("UKBA"(“UKBA”), other U.S. laws and regulations governing our international operations and similar laws in other countries.
In August 2017, one of our Brazilian subsidiaries was contacted by the Office of the Attorney General for the Brazilian state of Paraná in connection with a criminal investigation procedure initiated against agents of both Samsung Heavy Industries, a shipyard in South Korea (“SHI”), and Pride International LLC ("Pride") in relation to
the drilling services agreement with Petrobras for the DS-5 (the "DSA"). The Brazilian authorities requested information regarding our compliance program and the findings of our internal investigations relating to the DSA. We cooperated with the Office of the Attorney General and provided documents in response to its request. We cannot predict the scope or ultimate outcome of this procedure or whether any Brazilian governmental authority will open an investigation into Pride’s involvement in this matter, or if a proceeding were opened, the scope or ultimate outcome of any such investigation.
Any violation of the FCPA, OFAC regulations, the UKBA or other applicable anti-corruption laws by us, our partners, agents and our and their respective affiliated entities or their respective officers, directors, employees and agents could in some cases provide a customer with termination rights and other remedies under the terms of their contracts(s) with us and also result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in certain jurisdictions and could materially adversely affect our financial condition, operating results or cash flows or the availability of funds under our revolving credit facility.flows. Further, we may incur significant costs and consume significant internal resources in our efforts to detect, investigate and resolve actual or alleged violations.
Increasing regulatory complexity could adversely impact the costs associated with our offshore drilling operations and reduce demand.demand for our services.
The offshore contract drilling industry is dependent on demand for services from the oil and natural gas industry. Accordingly, we will be directly affected by the approval and adoption of laws and regulations limiting or curtailing exploration and development drilling for oil and natural gas for economic, environmental, safety and other policy reasons. Furthermore, we may be required to make significant capital expenditures or incur substantial additional costs to comply with new governmental laws and regulations. It is also possible that legislative and regulatory activity could materially adversely affect our operationsfinancial position, operating results or cash flows by limiting drilling opportunities or significantly increasing our operating costs. Increases in regulatory requirements, particularly in the U.S. Gulf of Mexico, could significantly increase our costs.opportunities. In recent years, we have seen several significant regulatory changes that have affected the way we operate in the U.S. Gulf of Mexico.
See
As a result of jackup rig fitness requirements during hurricane seasons issued by BSEE“Item 1. Business – Governmental Regulations and its predecessor agency, jackup rigs in the U.S. Gulf of Mexico are required to operate with a higher air gap (the space between the water level and the bottom of the rig's hull) during hurricane season, effectively reducing the water depth in which they can operate. The guidelines also provide for enhanced information and data requirements from oil and gas companies operating in the U.S. Gulf of Mexico. Current or future Notice to Lessees from the U.S. Department of the Interior or other rules, directives and regulations may further impact our customers' ability to obtain permits and commence or continue deep or shallow water operations in the U.S. Gulf of Mexico.
Environmental Matters.”
Proposed revisions to the 2016 Well Control Rule, which imposed new requirements for well-control and blowout prevention equipment that could increase our costs and cause delays in our operations due to unavailability of associated equipment, would revise requirements for well design, well control, casing, cementing, real-time monitoring and subsea containment. The revisions are targeted to ensure safety and environmental protection while correcting errors in the 2016 rule and reducing certain unnecessary regulatory burdens imposed under the existing regulations. The proposed revisions have not yet been finalized.
Although only operators are currently required to have a SEMS, BSEE has in the past stated that future rulemaking may require offshore drilling contractors to implement their own SEMS programs. The current SEMS regulations, which require written agreements between operators and contractors regarding the contractors’ support of the operators' safety and environmental policies at the worksite (including requirements for personnel training and written safe work practices), and the possibility of additional SEMS rules for contractors could expose us to increased costs.
Finally, since 2014, the United States Coast Guard has proposed new regulations that would impose GPS equipment and positioning requirements for drilling rigs operating in the U.S. Gulf of Mexico and issued notices
regarding the development of guidelines for cybersecurity measures used in the marine and offshore energy sectors for all vessels and facilities that are subject to the MTSA, including our rigs.
Any new or additional regulatory, legislative, permitting or certification requirements in the U.S., and other areas in which we operate, including laws and regulations that have or may impose increased financial responsibility, oil spill abatement contingency plan capability requirements, or additional operational requirements and certifications, could materially adversely affect our financial position, operating results or cash flows.
We anticipate that government regulation in other countries where we operate may follow the U.S. in regard to enhanced safety and environmental regulation, which could also result in governments imposing sanctions on contractors when operators fail to comply with regulations that impact drilling operations. Even if not a requirement in these countries, most international operating companies, and many others, are voluntarily complying with some or all of the U.S. inspections and safety and environmental guidelines when operating outside the U.S. Such additional governmental regulation and voluntary compliance by operators could increase the cost of our operations and expose us to greater liability.
Compliance with or breach of environmental laws can be costly and could limit our operations.
Our operations are subject to laws and regulations controlling the discharge of materials into the environment, pollution, contamination and hazardous waste disposal or otherwise relating to the protection of the environment. Environmental laws and regulations specifically applicable to our business activities could impose significant liability on us for damages, clean-up costs, fines and penalties in the event of oil spills or similar discharges of pollutants or contaminants into the environment or improper disposal of hazardous waste generated in the course of our operations. To date, such laws and regulations have not had a material adverse effect on our operating results, and we have not experienced an accident that has exposed us to material liability arising out of or relating to discharges of pollutants into the environment. However, the legislative, judicial and regulatory response to a well incident could substantially increase our and our customers'customers’ liabilities. In addition to potential increased liabilities, such legislative, judicial or regulatory action could impose increased financial, insurance or other requirements that may adversely impact the entire offshore drilling industry. See“Item 1. Business – Governmental Regulations and Environmental Matters” and “Item 3. Legal Proceedings – Environmental Matters.”
The International Convention on Oil Pollution Preparedness, ResponseSustainability initiatives and Cooperation, the International Convention on Civil Liability for Oil Pollution Damage 1992, the U.K. Merchant Shipping Act 1995, Marpol 73/78 (the International Convention for the Prevention of Pollution from Ships), the U.K. Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998, as amended, and other related legislation and regulations and the OPA 90, as amended, the Clean Water Act, and other U.S. federal statutes applicable to us and our operations, as well as similar statutes in Texas, Louisiana, other coastal states and other non-U.S. jurisdictions, address oil spill prevention, reporting and control and have significantly expanded potential liability, fine and penalty exposure across many segments of the oil and gas industry.
Such statutes and related regulations impose a variety of obligations on us related to the prevention of oil spills, disposal of waste and liability for resulting damages. For instance, OPA 90 imposes strict and, with limited exceptions, joint and several liability upon each responsible party for oil removal costs as well as a variety of fines, penalties and damages. Although OPA 90 provides for certain limits of liability, such limits are not applicable where there is any safety violation or where gross negligence is involved. Failure to comply with these statutes and regulations, including OPA 90, may subject us to civil or criminal enforcement action, which may not be covered by contractual indemnification or insurance and could have a material adverse effect on our financial position, operating results or cash flows. Further, remedies under the Clean Water Act and related legislation and OPA 90 do not preclude claims under state regulations or civil claims for damages to third parties under state laws.
Highhigh profile and catastrophic environmental events, includingsuch as the 2010 Macondo well incident, have heightened governmental and environmental concerns about the risks associated withled to increased regulation of offshore oil and natural gas drilling. We are adversely affected by restrictions on drilling in certainthe areas in which we operate, including policies and guidelines regarding the approval of drilling permits, restrictions on development and production activities, and directives and
regulations that have and may further impact our operations. From time to time, legislative and regulatory proposals have been introduced that would materially limit or prohibit offshore drilling in certain areas, or that would increase the liabilities or costs associated with offshore drilling. If new laws are enacted, or if government actions are taken that restrict or prohibit offshore drilling in our principal areas of operation or that impose environmental or other requirements that materially increase the liabilities, financial requirements or operating or equipment costs associated with offshore drilling, exploration, development, or production of oil and natural gas, our financial position, operating results or cash flows could be materially adversely affected.
Regulation of greenhouse gases and climate change could have a negative impact on our business.
Governments around the world are increasingly focused on enacting laws and regulations regarding climate change and regulation of greenhouse gases. Lawmakers and regulators in the jurisdictions where we operate have proposed or enacted regulations requiring reporting of greenhouse gas emissions and the restriction thereof, including increased fuel efficiency standards, carbon taxes or cap and trade systems, restrictive permitting, and incentives for renewable energy. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues and impose reductions of hydrocarbon-based fuels, including plans developed in connection with the Paris climate conference in December 2015 and the Katowice climate conference in December 2018. Laws or regulations incentivizing or mandating the use of alternative energy sources such as wind power and solar energy have also been enacted in certain jurisdictions. Additionally, numerous large cities globally and several countries have adopted programs to mandate or incentivize the conversion from internal combustion engine powered vehicles to electric-powered vehicles and placed restrictions on non-public transportation. Such policies or other laws, regulations, treaties and international agreements related to greenhouse gases and climate change may negatively impact the price of oil relative to other energy sources, reduce demand for hydrocarbons, limit drilling in the offshore oil and gas industry, or otherwise unfavorably impact our business, our suppliers and our customers, and result in increased compliance costs and additional operating restrictions, all of which would have a material adverse impact on our business. In addition, in recent years the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds, has promoted the divestment of fossil fuel equities and pressured lenders to cease or limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental initiatives aimed at limiting climate change and reducing air pollution could ultimately interfere with our business activities and operations and our access to capital.
In addition to potential impacts on our business resulting from climate-change legislation or regulations, our business also could be negatively affected by climate-change related physical changes or changes in weather patterns. An increase in severe weather patterns could result in damages to or loss of our rigs, impact our ability to conduct our operations and/or result in a disruption of our customers’ operations. Finally, increasing attention to the risks of climate change has resulted in an increased possibility of lawsuits or investigations brought by public and private entities against oil and natural gas companies in connection with their greenhouse gas emissions. Should we be targeted by any such litigation or investigations, we may incur liability, which, to the extent that societal pressures or political or other factors are involved, could be imposed without regard to the causation of or contribution to the asserted damage, or to other mitigating factors. The ultimate impact of greenhouse gas emissions-related agreements, legislation and measures on our company’s financial performance is highly uncertain because we are unable to predict with certainty, for a multitude of individual jurisdictions, the outcome of political decision-making processes and the variables and tradeoffs that inevitably occur in connection with such processes.
The IRS may not agree with the conclusion that we should be treated as a foreign corporation for U.S. federal tax purposes.
Although Valaris plcLimited is incorporated in the United KingdomBermuda (and thus would generally be considered a “foreign” corporation (or non-U.S. tax resident)), the U.S. Internal Revenue Service (“IRS”) mayIRS could assert that we should be treated as a U.S. corporation (and U.S. tax resident) pursuant to the rules under Section 7874 of the Internal Revenue Code (including as a result of the Atwood acquisition completed in 2017).Code. While we do not believe we are a U.S. corporation pursuant to these rules, the rules are complex and the determination is subject to
factual uncertainties. If the IRS successfully challenged our status as a foreign corporation, significant adverse tax consequences would result for us and for certain of our shareholders.
U.S. tax laws and IRS guidance could affect our ability to engage in certain acquisition strategies and certain internal restructurings.
Even if we are currently treated as a foreign corporation for U.S. federal income tax purposes, Section 7874 of the Internal Revenue Code and U.S. Treasury Regulations promulgated thereunder, including temporary Treasury Regulations, may adversely affect our ability to engage in certain future acquisitions of U.S. businesses in exchange for our equity, which may affect the tax efficiencies that otherwise might be achieved in such potential future transactions.
Governments may pass laws that subject us to additional taxation or may challenge our tax positions.
There is increasing uncertainty with respect to tax laws, regulations and treaties, and the interpretation and enforcement thereof that may affect our business. TheFor example, the Organization for Economic Cooperation and Development (“OECD”) has issued its final reports on base erosion, the European Union, and profit shifting, which generally focus on situations where profits are earnedcertain other countries (including countries in low-tax jurisdictions, or payments are made between affiliates from jurisdictions with high tax rates to jurisdictions with lower tax rates. Certain countries within which we operate have recently enactedoperate) are committed to enacting substantial changes to theirnumerous long-standing tax lawsprinciples impacting how large multinational enterprises are taxed. In particular, the OECD’s Pillar Two initiative introduces a 15% global minimum tax applied on a country-by-country basis and for which many jurisdictions committed to an effective enactment date starting January 1, 2024, though not all jurisdictions were expected to meet this target deadline. The impact of these potential new rules as well as any other changes in response to the OECD recommendations or otherwisedomestic and theseinternational tax rules and other countries may enact changes to their tax laws or practices in the future (prospectively or retroactively), which mayregulations could have a material adverse effect on our financial position, operating results or cash flows. U.S. federal incomeeffective tax reform legislation enacted in late 2017 introduced significant changes to U.S. income tax law, including a reduction in the statutory income tax rate from 35% to 21%, a one-time transition tax on deemed repatriation of deferred foreign income, a base erosion anti-abuse tax that effectively imposes a minimum tax on certain payments to non-U.S. affiliates, new and revised rules relating to the current taxation of certain income of foreign subsidiaries and revised rules associated with limitations on the deduction of interest.rate.
In addition, our tax positions are subject to audit by U.K., U.S. and other foreign tax authorities. Such tax authorities may, and do from time to time, disagree with our interpretations or assessments of the effects of tax laws, treaties or regulations or their applicability to our corporate structure or certain transactions we have undertaken. We currently are subject to tax assessments in various jurisdictions, which we are contesting. Even if we are successful in maintaining our tax positions, we may incur significant expenses in defending our positions and contesting claims asserted by tax authorities. If we are unsuccessful in defending our tax positions, the resulting assessments or rulings could significantly impact our consolidated income taxes in past or future periods.
As required by law, we file periodic tax returns that are subject to review and examination by various revenue agencies within the jurisdictions in which we operate. We are currently subject to tax assessments in various jurisdictions, which we are contesting.
As a result of these uncertainties, as well as changes in the administrative practices and precedents of tax authorities or other matters, (suchsuch as changes in applicable accounting rules)rules, that increase the amounts we have provided for income taxes or deferred tax assets and liabilities in our consolidated financial statements, we cannot provide any assurances as to what our consolidated effective income tax rate will be in future periods. If we are unable to mitigate the negative consequences of any change in law, audit or other matters, this could cause our consolidated income taxes to increase and cause a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
Our consolidated effective income tax rate may vary substantially over time.
We cannot provide any assurances as to what our future consolidated effective income tax rate will be because of, among other matters, uncertainty regarding the nature and extent of our business activities in any particular jurisdiction in the future and the tax laws of such jurisdictions, as well as potential changes in U.K., U.S. and other foreign tax laws, regulations or treaties or the interpretation or enforcement thereof, changes in the
administrative practices and precedents of tax authorities or other matters (such as changes in applicable accounting rules) that increase the amounts we have provided for income taxes or deferred tax assets and liabilities in our consolidated financial statements. In addition, as a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in the overall level of our income and changes in tax laws, our consolidated effective income tax rate may vary substantially from one reporting period to another. In periods of declining profitability, our income tax expense may not decline proportionately with income. Further, we may continue to incur income tax expense in periods in which we operate at a loss. Income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary, as does the tax base to which the rates are applied. In some cases, tax rates may be applicable to gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws, rather than to net income. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries.subsidiaries, which may result in the imposition of transaction taxes, which could be material. If we are unable to mitigate the negative consequences of any change in law, audit, business activity or other matters, this could cause our consolidated effective income tax rate to increase and cause a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
Investor enforcementWe are subject to litigation that could have a material adverse effect on us.
We are, from time to time, involved in various litigation matters. These matters may include, among other things, contract disputes, personal injury claims, toxic tort claims, environmental claims or proceedings, employment matters, issues related to employee or representative conduct, governmental claims for taxes or duties, and other litigation that arises in the ordinary course of civilour business. Although we intend to defend or pursue such matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and there can be no assurance as to the ultimate outcome of any litigation. Litigation could materially adversely affect our financial position, operating results or cash flows because of potential negative outcomes, legal fees, the allocation of management’s time and attention, and other factors.
We could also face increased climate-related litigation with respect to our operations both in the U.S. and around the world. Governmental and other entities in various states, such as California and New York, have filed lawsuits against coal, oil and natural gas companies. These suits allege damages as a result of climate change, and the plaintiffs are seeking unspecified damages and abatement under various legal theories. Similar lawsuits may be filed in other jurisdictions both in the U.S. and globally. Although we are not currently a party to any such lawsuit, these suits present uncertainty regarding the extent to which companies who are not producing oil or natural gas, but who are engaged to provide services to support production activities, such as offshore drilling companies, face an increased risk of liability stemming from climate-related litigation, which risk would also adversely impact the oil and natural gas industry and impact demand for our services.
We are a Bermuda company and it may be difficult to enforce judgments against us may be more difficult.or our directors and executive officers.
Because weWe are a public limited companyBermuda exempted company. As a result, the rights of holders of our Common Shares are governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated underin other jurisdictions. Some of our directors and officers are not residents of the LawsU.S., and a substantial portion of England and Wales, investors could experience difficulty enforcing judgments obtained against us inour assets are located outside the U.S. courts. In addition,As a result, it may be difficult for investors to effect service of process on those persons in the U.S. or to enforce in the U.S. judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the U.S., against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.
Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.
Provisions in our bye-laws could delay or prevent a change in control of our company, which could materially adversely affect the price of our Common Shares.
Some of the provisions in our bye-laws could delay or prevent a change in control of our company that a shareholder may consider favorable, which could materially adversely affect the price of our Common Shares. Certain provisions of our bye-laws could make it more difficult (or impossible)for a third party to bring some typesacquire control of claims against us in courts in England than itour company, even if the change of control would be beneficial to bring similar claims againstour shareholders. These provisions include:
•authority of our board of directors to determine its size;
•the ability of our board of directors to issue preferred shares without shareholder approval;
•limitations on the removal of directors; and
•limitations on the ability of our shareholders to act by written consent in lieu of a U.S. companymeeting.
In addition, our bye-laws establish advance notice provisions for shareholder proposals and nominations for elections to the board of directors to be acted upon at meetings of shareholders.
Legislation enacted in Bermuda as to Economic Substance may affect our operations.
The Economic Substance Act came into effect in Bermuda on January 1, 2019. This law requires a U.S. court.registered entity other than an entity which is resident for tax purposes in certain jurisdictions outside Bermuda that carries as a business any one or more of the “relevant activities” must comply with economic substance requirements. The Economic Substance Act may require in-scope Bermuda entities, which are engaged in such “relevant activities,” to be directed and managed in Bermuda, have an adequate level of qualified employees in Bermuda, incur an adequate level of annual expenditure in Bermuda, maintain physical offices and premises in Bermuda or perform core income-generating activities in Bermuda. The list of “relevant activities” includes carrying on any one or more of: banking, insurance, fund management, financing and leasing, headquarters, shipping, distribution and service center, intellectual property and holding entities. The Economic Substance Act could affect the manner in which we operate our business. To the extent we or any of our Bermuda subsidiaries carry on any relevant activities for the purposes of the Economic Substance Act, we or such subsidiaries will be required to comply with such economic substance requirements. Our compliance with the Economic Substance Act
may result in additional costs that could have a material adverse effect on our financial position or results of operations.
Our business could be affected as a result of activist investors.
Publicly traded companies have increasingly become subject to campaigns by activist investors advocating corporate actions such as actions related to environment, social and governance (“ESG”)sustainability matters, financial restructuring, increased borrowing, dividends, share repurchases or even sales of assets or even the entire company. Responding to proxy contests and other actions by such activist investors or others in the future could be costly and time-consuming, disrupt our operations and divert the attention of our Boardboard of Directorsdirectors and senior management from the pursuit of our business strategies, which could materially adversely affect our financial position, operating results of operations and financial condition.or cash flows. Additionally, perceived uncertainties as to our future direction as a result of investor activism or changes to the composition of the Boardboard of Directorsdirectors may lead to the perception of a change in the direction of our business, instability or lack of continuity, which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or transact with our competitors instead of us because of any such issues, then our revenue, earnings andfinancial position, operating results or cash flows could be materially adversely affected. In addition, the trading price of our shares could experience periods of increased volatility as a result of investor activism.
Risks Related to Our International Operations:Operations
Our non-U.S. operations involve additional risks not typically associated with U.S. operations.
Revenues from non-U.S. operations were 83%80%, 85%78%, 87% and 87%81% of our total consolidated revenues during 2020, 2019for the years ended December 31, 2023 and 2018,2022, and eight months ended December 31, 2021 (Successor) and for four months ended April 30, 2021 (Predecessor), respectively. Our non-U.S. operations and shipyard rig construction and enhancement projects are subject to political, economic and other uncertainties, including:
•terrorist acts, war and civil disturbances,
•expropriation, nationalization, deprivation or confiscation of our equipment or our customer'scustomer’s property,
•repudiation or nationalization of contracts,
•assaults on property or personnel,
•piracy, kidnapping and extortion demands,
•significant governmental influence over many aspects of local economies and customers,
•unexpected changes in law and regulatory requirements, including changes in interpretation or enforcement of existing laws,
•work stoppages, often due tosuch as labor strikes, over which we have little or no control,
•complications associated with repairing and replacing equipment in remote locations,
•limitations on insurance coverage, such as war risk coverage, in certain areas,
•imposition of trade barriers,
•wage and price controls,
•import-export quotas,
•exchange restrictions,
•currency fluctuations
•and changes in monetary policies,
policy,
•uncertainty or instability resulting from hostilities or other crises in the Middle East, West Africa, Latin America, Southeastern Asia, Eastern Europe or other geographic areas in which we operate,
•changes in the manner or rate of taxation,
•limitations on our ability to recover amounts due,
•increased risk of government and vendor/supplier corruption,
•increased local content requirements,
•the occurrence or threat of epidemic or pandemic diseases (including the COVID-19 pandemic) and any government response to such occurrence or threat,
•changes in political conditions, and
•other forms of government regulation and economic conditions that are beyond our control.
We historically have maintained insurance coverage and obtained contractual indemnities that protect us from some, but not all, of the risks associated with our non-U.S. operations such as nationalization, deprivation, expropriation, confiscation, political and war risks. However, there can be no assurance that any particular type of contractual or insurance protection will be available in the future or that we will be able to purchase our desired level of insurance coverage at commercially feasible rates. Moreover, we may initiate a self-insurance program through one or more captive insurance subsidiaries. In circumstances where we have insurance protection for some or all of the risks sometimes associated with non-U.S. operations, such insurance may be subject to cancellation on short notice, and it is unlikely that we would be able to remove our rig or rigs from the affected area within the notice period. Accordingly, a significant event for which we are uninsured, underinsured or self-insured, or for
which we have not received an enforceable contractual indemnity from a customer, could cause a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
We are subject to various tax laws and regulations in substantially all countries in which we operate or have a legal presence. Actions by tax authorities that impact our business structures and operating strategies, such as changes to tax treaties, laws and regulations, or the interpretation or repeal of any of the foregoing or changes in the administrative practices and precedents of tax authorities, adverse rulings in connection with audits or otherwise, or other challenges may have a material impact on our tax expense.
As required by law, we file periodic tax returns that are subject to review and examination by various revenue agencies within the jurisdictions in which we operate. We are currently subject to tax assessments in various jurisdictions, which we are contesting. Although the outcome of such assessments cannot be predicted with certainty, unfavorable outcomes could have a material adverse effect on our liquidity.
Our non-U.S. operations also face the risk of fluctuating currency values, which may impact our revenues, operating costs and capital expenditures. We currently conduct contract drilling operations in certain countries that have experienced substantial fluctuations in the value of their currency compared to the U.S. dollar. In addition, some of the countries in which we operate have occasionally enacted exchange controls. Generally, we have contractually mitigated these risks by invoicing and receiving payment in U.S. dollars (our functional currency) or freely convertible currency and, to the extent possible, by limiting our acceptance of foreign currency to amounts which approximate our expenditure requirements in such currencies. However, not all of our contracts contain these terms and there is no assurance that our contracts will contain such terms in the future.
A portion of the costs and expenditures incurred by our non-U.S. operations, including certain capital expenditures, are settled in local currencies, exposing us to risks associated with fluctuation in the value of these currencies relative to the U.S. dollar. We use foreign currency forward contracts to reduce this exposure in certain cases. However, a relative weakening in the value of the U.S. dollar in relation to the local currencies in these countries may increase our costs and expenditures.
Our non-U.S. operations are also subject to various laws and regulations in the countries in which we operate, including laws and regulations relating to the operation of drilling rigs and the requirements for equipment. We may be required to make significant capital expenditures to operate in such countries, which may not be reimbursed by our customers. Governments in some countries have become increasinglyare active in regulating and controlling the ownership of oil, natural gas and mineral concessions and companies holding such concessions, the exploration of oil and natural gas and other aspects of the oil and natural gas industry in their countries. In some areas of the world, government activity has materially adversely affected the amount of exploration and development work performed by major international oil companies and may continue to do so. Moreover, certain countries accord preferential treatment to local contractors or joint ventures or impose specific quotas for local goods and services, which can increase our operational costs and place us at a competitive disadvantage. There can be no assurance that such laws and regulations or activities will not have a material adverse effect onmaterially adversely affect our future operations.financial position, operating results or cash flows.
The shipment of goods, services and technology across international borders subjects us to extensive trade laws and regulations. Our import activities are governed by specific customs laws and regulations in each of the countries where we operate. Moreover, many countries, including the United States,U.S., control the export and re-export of certain goods, services and technology and impose related export recordkeeping and reporting obligations. Governments also may impose express or de facto economic sanctions against certain countries, persons and other entities that may restrict or prohibit transactions involving such countries, persons and entities.
The laws and regulations concerning import activity, export recordkeeping and reporting, export control and economic sanctions are complex and constantlyfrequently changing. These laws and regulations may be enacted, amended, enforced or interpreted in a manner materially impacting our operations. Shipments can be delayed and denied export or entry for a variety of reasons, some of which are outside our control and some of which may result from failure to comply with existing legal and regulatory regimes. Shipping delays or denials could cause unscheduled
operational downtime, reduced day rates during such downtime and contract cancellations. Any failure to comply with applicable legal and regulatory trading obligations also could result in criminal and civil penalties and sanctions, such as fines, imprisonment, exclusion from government contracts, seizure of shipments and loss of import and export privileges.
Our partners, agents and our and their respective affiliated entities or respective officers, directors, employees contractors and agents may take actions in violation of our policies and procedures designed to promote compliance with the laws of the jurisdictions in which we operate. Any such violation could have a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
The U.K.'s withdrawal from the E.U. maySustainability Risks
Regulation of GHG and climate change could have a negative effectimpact on economic conditions, financial markets and our business.
In June 2016,Governments around the world are increasingly focused on enacting laws and regulations regarding climate change and regulation of GHG that may impact our operations, profitability and competitiveness. Restrictions on GHG emissions or other related legislative or regulatory enactments could have an indirect effect in those industries that use significant amounts of petroleum products, which could potentially result in a referendum was heldreduction in demand for petroleum products and, consequently, our offshore contract drilling services. Lawmakers and regulators in the U.K. which resulted in a majority voting in favorU.S. and certain jurisdictions where we operate have proposed or enacted regulations requiring reporting of the U.K. withdrawing from the E.U. (commonly referred to as “Brexit”). Pursuant to legislation approved by the U.K. ParliamentGHG emissions and the E.U. Parliament in January 2020,restriction thereof, including increased fuel efficiency standards, carbon taxes or cap and trade systems, restrictive permitting, and incentives for renewable energy. For example, the U.K. withdrew fromSEC has proposed a mandatory climate change reporting framework that, if implemented, is likely to materially increase the E.U. with effect from 11 p.m. (GMT) on January 31, 2020amount of time, monitoring, diligence, and reporting costs related to these matters. In 2023, the current U.S. administration continued initiatives targeting the reduction of methane emissions, including a focus on the termsenergy sector. In December 2023, the EPA adopted a final rule enacting a series of a withdrawal agreement agreed betweenactions targeting methane and other emission reductions in natural gas and oil operations. Global efforts have been made and continue to be made in the U.K.international community toward the adoption of international treaties or protocols that would address global climate change issues and impose reductions of hydrocarbon-based fuels, including plans developed in connection with the Paris climate conference in December 2015, the Katowice climate conference in December 2018 and the E.U. in October 2019 (the “Withdrawal Agreement”). The Withdrawal Agreement providedUN Climate Change Conferences since 2021. In January 2023, the EU enacted the Corporate Sustainability Reporting Directive, which will require sustainability reporting across a broad range of sustainability topics for the U.K.’s withdrawal to be followed by a “transition period”, during which, in summary, the U.K. was not a member of the E.U. but most E.U. rulesboth EU and regulations continued to apply to the U.K. During the transition period, the U.K. and the E.U. sought to negotiate the terms of a long-term trading relationship between the U.K. and the E.U. based on a “Political Declaration” agreed between the U.K. and the E.U. in October 2019. The transition period expired on December 31, 2020.non-EU companies.
On December 24, 2020,Laws or regulations incentivizing or mandating the European Commissionuse of alternative energy sources such as wind power and solar energy have also been enacted in certain jurisdictions. Additionally, numerous large cities globally and several countries have adopted programs to mandate or incentivize the United Kingdom reached agreementconversion from internal combustion engine powered vehicles to electric-powered vehicles and placed restrictions on non-public transportation. Such policies or other laws, regulations, treaties and international agreements related to GHG and climate change may negatively impact the termsprice of oil relative to other energy sources, reduce demand for hydrocarbons, limit drilling in the U.K.’s future relationship with the E.U. (the “Tradeoffshore oil and Cooperation Agreement”). As negotiations concerning the termsnatural gas industry, or otherwise unfavorably impact our business, our suppliers and our customers, and result in increased compliance costs and additional operating restrictions, all of the Trade and Cooperation Agreementwhich could only be finalized shortly before the expiry of the transition period, the European Commission has determined to apply the Trade and Cooperation Agreement provisionally with effect from January 1, 2021, until it can be formally ratified by the European Union. This will require the European Parliament to give its consent to the Trade and Cooperation Agreement and the Council of the European Union to adopt a formal decision on its conclusion. It is currently expected that such processes will be completed during the first quarter of 2021.
Many of the practical effects of the Trade and Cooperation Agreement will only become clear with the passage of time and at present it is not possible for us to estimate with certainty whether its implementation will have a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows. While the Trade and Cooperation Agreement provides for zero tariffs and quotas on the movement of goods between the U.K. and the E.U. (provided they comply with the parties’ agreed rules of origin) and also seeks to minimize trade disruption arising from technical and administrative barriers to trade, there can be no guarantee that the implementation of theTrade and Cooperation Agreement will not lead to significant increased costs and supply chain disruption for our business and the businesses of our U.K. customers and suppliers. Any incremental costs incurred by our U.K. suppliers may be passed on to us and any supply chain disruption experienced by our U.K. customers or suppliers may in turn disrupt our own operations.
The U.K.’s withdrawal from the E.U. has also given rise to calls for the governments of other E.U. member states to consider withdrawal, while the U.K.’s withdrawal negotiation process has increased the risk of the possibility of a further referendum concerning Scotland’s independence from the rest of the U.K. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global, regional and/or national economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity.
The implementation of the Trade and Cooperation Agreement and/or any subsequent divergence of the law applicable in the U.K. and the E.U. could depress economic activity, result in changes to currency exchange rates, taxes, import/export regulations, laws and other regulatory matters, and/or restrict our access to capital and the free movement of our employees, which could have a material adverse effect on our financial position, operating results
In addition to potential impacts on our business resulting from climate-change legislation or cash flows. Approximately 15%regulations, our business also could be materially adversely affected by climate-change related physical changes, such as changing weather patterns. An increase in severe weather patterns could result in damage to or loss of our total revenues were generateddrilling rigs, impact our ability to conduct our operations and/or result in a disruption of our customers’ operations. Finally, increasing attention to the U.K. forrisks of climate change has resulted in an increased possibility of lawsuits or investigations brought by public and private entities against oil and natural gas companies in connection with their GHG emissions. Should we be targeted by any such litigation or investigations, we may incur liability, which could be imposed without regard to the year ended December 31, 2020.causation of or contribution to the asserted damage, or to other mitigating factors. The ultimate impact of GHG emissions-related agreements, legislation and measures on our financial performance is highly uncertain because we are unable to predict, in a multitude of jurisdictions, the outcome of political decision-making processes.
Consumer preferences for alternative fuels and electric-powered vehicles, as part of the global energy transition, may lead to reduced demand for our services.
The increasing penetration of renewable energy into the energy supply mix, the increased production of electric-powered vehicles and improvements in energy storage, as well as changes in consumer preferences, including increased consumer demand for alternative fuels, energy sources and electric-powered vehicles may materially adversely affect the demand for oil and natural gas and our drilling services. This evolving transition of the global energy system from fossil-based systems of energy production and consumption to more renewable energy sources, commonly referred to as the energy transition, could have a material adverse impact on our results of operations, financial position and cash flows. As a result of changes in consumer preferences and uncertainty regarding the pace of the energy transition and expected impacts on oil and natural gas demand, some of our customers are transitioning their businesses to renewable energy projects and away from oil and natural gas exploration and production, which may result in reduced capital spending by such customers on oil and natural gas projects and in turn reduced demand for our services.
Increased scrutiny from stakeholders and others regarding climate change, as well as our sustainability practices, initiatives and reporting responsibilities, could result in additional costs or risks.
In recent years the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds, has promoted the divestment of fossil fuel equities and pressured lenders to cease or limit funding to companies engaged in the extraction of fossil fuel reserves. Such initiatives could ultimately interfere with our access to capital, business activities and operations.
In addition to such initiatives, sustainability matters more generally have been the subject of increased focus by investors, customers, investment funds, political advocacy groups, and other market and industry participants, as well as certain regulators, including in the U.S. and the EU. We publish an annual Sustainability Report, which includes disclosure of our sustainability practices, aspirations, targets and goals. Our disclosures on these matters rely on management’s expectations as of the date the statements are first made, as well as standards for measuring progress that are still in development and may change or fail to be realized. These expectations and standards may continue to evolve. Even so, our failure or inability to meet these targets, goals or evolving stakeholder expectations for sustainability practices and reporting and even the perception of such failure or inability may potentially harm our reputation and impact employee retention, customer relationships and access to capital, among other matters. For example, certain market participants use third-party benchmarks or scores to measure a company’s sustainability practices in making investment decisions and customers and suppliers may evaluate our sustainability practices or require that we adopt certain sustainability policies as a condition of awarding contracts. By electing to set and share publicly our corporate sustainability standards, our business may face increased scrutiny related to sustainability activities and be unable to satisfy all stakeholders. For example, some stakeholders and regulators have expressed or pursued opposing views, legislation, and investment expectations with respect to sustainability. As sustainability best-practices and voluntary or mandatory reporting standards continue to develop, we may incur increased costs related to sustainability monitoring and reporting and complying with sustainability initiatives, especially to the extent these standards are not harmonized or consistent. In addition, it may be difficult or expensive for us to comply with any sustainability-linked contracting policies adopted by customers and suppliers,
particularly given the complexity of our supply chain, our reliance on third-party manufacturers, and the potential for jurisdictions in which we operate to enact opposing or incompatible regulations. Actions we may take to achieve our sustainability initiatives, including the development and implementation of new emissions-reduction technology, may require increased expenditures, which may materially adversely affect our financial position, operating results or cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 1C.Cybersecurity
We have a cybersecurity program to assess, identify, and manage risks from cybersecurity threats. The Company’s cybersecurity program includes administrative, technical, and physical safeguards that address our information systems, including our IT and operational technology environments. The program is designed to ensure the confidentiality, security, integrity, and availability of those systems and the information residing therein.
Strategy and Risk Management:
Our cybersecurity strategy leverages administrative safeguards that include policies, procedures, and processes to assess, identify, and manage risks from cybersecurity threats. We have adopted a Cybersecurity Incident Response Policy (the “CIRP”), which provides a framework and guidance for investigating, containing, documenting and mitigating incidents, including reporting findings and keeping senior management and other key stakeholders informed and involved as appropriate.
Additionally, all of the Company’s employees undertake an annual cybersecurity training program on how to identify characteristics of various cybersecurity threats, which is augmented by additional training and communications on IT and cybersecurity matters throughout the year. Periodically during the year, the Company’s IT department leads simulations of cybersecurity incidents with employees to test the organization’s ability to respond to a variety of cybersecurity-related scenarios.
Our policies, procedures, and processes are aligned with our technical tools, which include continuous security monitoring and alerting, an AI-based tool to facilitate cybersecurity incident identification and remediation, and other technologies, to ensure the security of our systems and information. We also have implemented certain physical safeguards, such as restricted access to areas containing critical IT and operational technology equipment, to mitigate risks to our physical environment.
Cybersecurity is integrated into our enterprise risk management ("ERM") process. Cybersecurity-related risks are included in our ERM risk register, which are reviewed by internal stakeholders who designate the relative level of severity of identified risks. The ERM risk register, which includes any identified cybersecurity-related risks, is reviewed by our Executive Management Committee and is reported quarterly to the board of directors, who then reviews the identified risks, mitigation plans and monitoring reports and provides oversight as appropriate.
Oversight:
The Audit Committee is responsible for, and actively engaged in, the oversight of our IT and cybersecurity program, including the oversight of risks from cybersecurity threats. All members of the Audit Committee have prior work experience relating to cybersecurity or have obtained a certification or degree in cybersecurity. The Audit Committee, at least quarterly, receives reports from the Company’s Senior Director – Information Technology (“SDIT”) on, among other things, the Company’s cybersecurity incidents, risks and measures, training and organizational readiness. The board of directors is kept apprised of cybersecurity risk matters, including through participation in the quarterly cybersecurity briefings to the Audit Committee that are described above. We have protocols by which certain cybersecurity incidents are escalated within the Company and, where appropriate, reported in a timely manner to the board of directors and Audit Committee.
At the management level, the SDIT and his team are responsible for leading enterprise-wide information security strategy, policy, standards, architecture and processes, including the assessment and management of material risks from cybersecurity threats. The Company’s SDIT reports to the Chief Financial Officer. The SDIT has extensive cybersecurity knowledge and skills, gained from over 25 years of relevant work experience. The SDIT is informed about and monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents in accordance with the CIRP and policies and procedures, which may include reports from the IT team. The SDIT also regularly reviews risk management measures implemented by the Company to identify and mitigate cybersecurity risks.
Third Parties and Assessments:
We engage third-party service providers in various capacities to enhance our internal cybersecurity capabilities. The Company engages consultants to assist with cybersecurity assessments, including with respect to cloud security and network vulnerability testing. Internal Audit, along with other internal stakeholders, including IT, determine the Company’s need for cybersecurity assessments in conjunction with an annual cybersecurity risk assessment process.
Further, pursuant to our CIRP, we have engaged third-party support under a retainer agreement to enable an effective and timely response to a significant cybersecurity incident.
In addition to assessing our own cybersecurity preparedness, we also consider and evaluate cybersecurity risks associated with use of third-party service providers. We obtain Systems and Organization Controls ("SOC") 1 and SOC 2 reports, as applicable, from our third-party service providers which assess those entities' controls to cover security, availability, integrity, confidentiality and privacy. Any applicable findings of this third-party assessment are analyzed by the appropriate employees and further action is taken as needed.
Impact of Cybersecurity Risks and Threats:
While we have not experienced any material cybersecurity threats or incidents as of the date of this Annual Report on Form 10-K, there can be no guarantee that we will not be the subject of future successful attacks, threats or incidents. Additional information on cybersecurity risks we face is discussed in “Item 1A. Risk Factors,” which should be read in conjunction with the foregoing information.
Item 2. Properties
Contract Drilling Fleet
The following table provides certain information about the rigs in our drilling fleet as of February 22, 2021:15, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rig Name | Rig Type | | Year Delivered | |
Year Built/
Rebuilt | Design | | Maximum Water Depth/ Drilling Depth | | Location | Status |
Floaters | | | | | | | | | | |
VALARIS DS-4 | Drillship | | 2010 | | Dynamically Positioned | | 12,000'/40,000' | | Brazil | United KingdomUnder contract | Preservation stacked(1)
|
VALARIS DS-7 | Drillship | | 2013 | | Dynamically Positioned | | 10,000'/40,000' | | Spain | Preservation stackedUnder reactivation(1)(2)
|
VALARIS DS-8 | Drillship | | 2015 | | Dynamically Positioned | | 12,000'/40,000' | | Brazil | United KingdomUnder contract | Preservation stacked(1)
|
VALARIS DS-9 | Drillship | | 2015 | | Dynamically Positioned | | 12,000'/40,000' | | Angola | SpainUnder contract | Preservation stacked(1)
|
VALARIS DS-10 | Drillship | | 2017 | | 2015 | Dynamically Positioned | | 12,000'/40,000' | | Nigeria | Under contract |
VALARIS DS-11 | Drillship | | 2013 | | Dynamically Positioned | | 12,000'/40,000' | | Spain | Preservation stacked(1) |
VALARIS DS-12 | Drillship | | 2013 | | Dynamically Positioned | | 12,000'/40,000' | | AngolaEgypt | Under contract |
VALARIS DS-13 | Drillship | | 2023 | | Under construction | Dynamically Positioned | | 12,000'/40,000' | | South KoreaMobilizing(3)
| OptionMobilizing(2)(3)
|
VALARIS DS-14 | Drillship | | 2023 | | Under construction | Dynamically Positioned | | 12,000'/40,000' | | South KoreaMobilizing(3)
| OptionMobilizing(2)(3)
|
VALARIS DS-15 | Drillship | | 2014 | | Dynamically Positioned | | 12,000'/40,000' | | MexicoBrazil | Under contract |
VALARIS DS-16 | Drillship | | 2014 | | Dynamically Positioned | | 12,000'/40,000' | | Spain | Preservation stacked(1)
|
VALARIS DS-17 | Drillship | | 2014 | | Dynamically Positioned | | 12,000'/40,000' | | Spain | Preservation stacked(1)
|
VALARIS DS-18 | Drillship | | 2015 | | Dynamically Positioned | | 12,000'/40,000' | | Gulf of Mexico | Under contract |
VALARIS 8503DS-17 | Drillship | | 2014 | | Dynamically Positioned | | 12,000'/40,000' | | Brazil | Under contract |
VALARIS DS-18 | Drillship | | 2015 | | Dynamically Positioned | | 12,000'/40,000' | | Gulf of Mexico | Under contract |
VALARIS DPS-1 | Semisubmersible | | 20102012 | | Dynamically Positioned | | 10,000'/35,000' | | Australia | Under contract |
VALARIS DPS-3 | Semisubmersible | | 2010 | | Dynamically Positioned | | 8,500'/37,500' | | Gulf of Mexico | Preservation stacked(1) |
VALARIS 8505DPS-5 | Semisubmersible | | 2012 | | Dynamically Positioned | | 8,500'/35,000' | | Gulf of Mexico | Under contract |
VALARIS 8506DPS-6 | Semisubmersible | | 2012 | | Dynamically Positioned | | 8,500'/35,000' | | Gulf of Mexico | Preservation stacked(1) |
VALARIS DPS-1 | Semisubmersible | | 2012 | | F&G ExD Millennium | | 10,000'/35,000' | | Malaysia | Available |
VALARIS MS-1 | Semisubmersible | | 2011 | | F&G ExD Millennium, Moored | | 8,200'/40,000 | | Australia | Under contract |
Jackups | | | | | | | | | | |
VALARIS JU-2272 | Jackup | | 1981 | | 1980/2011 | MLT 116-C | | 313'/25,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-36 | Jackup | | 1981/2011 | | MLT 116-C | | 300'/25,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-37 | Jackup | | 1981/2011 | | MLT 116-C | | 300'/25,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-54 | Jackup | | 1982/2004 | | F&G L-780 MOD II-C | | 300'/25,000' | | Saudi Arabia | Under contract |
VALARIS JU-67 | Jackup | | 1976/2005 | | MLT 84-CE | | 350'/30,000' | | Indonesia | Under contract |
VALARIS JU-72 | Jackup | | 1981/2011 | | Hitachi K1025N | | 225'/25,000' | | United Kingdom | Under contract |
VALARIS JU-7575 | Jackup | | 1999 | | MLT Super 116-C | | 400'/30,000' | | Gulf of Mexico | Preservation stacked(1) |
VALARIS JU-7676 | Jackup | | 2000 | | MLT Super 116-C | | 350'/30,000' | | Saudi Arabia | UnderPreparing for lease contract(4)
|
VALARIS JU-9292 | Jackup | | 1982 | | 1982/2003 | MLT 116-C | | 210'/25,000' | | United Kingdom | Under contract |
VALARIS JU-100102 | Jackup | | 1987/20092002 | | MLT 150-88-C | | 328'/25,000' | | Denmark | Preservation stacked(1)
|
VALARIS JU-101 | Jackup | | 2000/2010 | | KFELS MOD V-A | | 400'/30,000' | | United Kingdom | Preservation stacked(1)
|
VALARIS JU-102 | Jackup | | 2002 | | KFELS MOD V-A | | 400'/30,000' | | Gulf of Mexico | Under contract |
VALARIS JU-104 | Jackup | | 2002/2011 | | KFELS MOD V-B | | 400'/30,000' | | UAE | Preservation stacked(1)
|
VALARIS JU-106 | Jackup | | 2005 | | KFELS MOD V-B | | 400'/30,000' | | Indonesia | Under contract |
VALARIS JU-107 | Jackup | | 2006 | | KFELS MOD V-B | | 400'/30,000' | | Australia | Under contract |
VALARIS JU-108 | Jackup | | 2007/2009 | | KFELS MOD V-B | | 400'/30,000' | | Saudi Arabia | Under contract |
VALARIS JU-109 | Jackup | | 2008 | | KFELS MOD V-Super B | | 350'/35,000' | | Namibia | Preservation stacked(1)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rig Name | Rig Type | | Year Built/ Rebuilt | | Design | | Maximum Water Depth/ Drilling Depth | | Location | Status |
Jackups | | | | | | | | | | |
VALARIS JU-110 | Jackup | | 2015 | | KFELS MOD V-B | | 400'/35,000' | | Qatar | Under contract |
VALARIS JU-111 | Jackup | | 2003 | | KFELS MOD V Enhanced B-Class | | 400'/36,000' | | Malta | Preservation stacked(1)
|
VALARIS JU-113 | Jackup | | 2012 | | Baker Marine Pacific Class 400 | | 400'/30,000' | | Philippines | Preservation stacked(1)
|
VALARIS JU-114 | Jackup | | 2012 | | Baker Marine Pacific Class 400 | | 400'/30,000' | | Philippines | Preservation stacked(1)
|
VALARIS JU-115 | Jackup | | 2013 | | Baker Marine Pacific Class 400 | | 400'/30,000' | | Thailand | Under contract |
VALARIS JU-116 | Jackup | | 2008/2018 | | LT 240- C | | 375'/35,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-117 | Jackup | | 2009 | | LT 240- C | | 350'/35,000' | | Gulf of Mexico | Available |
VALARIS JU-118 | Jackup | | 2012 | | LT 240- C | | 350'/35,000 | | Mexico | Under contract |
VALARIS JU-120 | Jackup | | 2013 | | KFELS Super A | | 400'/40,000' | | United Kingdom | Under contract |
VALARIS JU-121 | Jackup | | 2013 | | KFELS Super A | | 400'/40,000' | | United Kingdom | Under contract |
VALARIS JU-122 | Jackup | | 2013 | | KFELS Super A | | 400'/40,000' | | United Kingdom | Under contract |
VALARIS JU-123 | Jackup | | 2016 | | KFELS Super A | | 400'/40,000' | | United Kingdom | Under contract |
VALARIS JU-140 | Jackup | | 2016 | | LT Super 116E | | 340'/30,000' | | Saudi Arabia | Under contract |
VALARIS JU-141 | Jackup | | 2016 | | LT Super 116E | | 340'/30,000' | | Saudi Arabia | Under contract |
VALARIS JU-142 | Jackup | | 2008 | | LT Super 116-E | | 350'/36,000' | | Malta | Preservation stacked(1)
|
VALARIS JU-143 | Jackup | | 2010/2018 | | LT EXL Super 116-E | | 350'/35,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-144 | Jackup | | 2010 | | LT Super 116-E | | 350'/35,000' | | Mexico | Under contract |
VALARIS JU-145 | Jackup | | 2010 | | LT Super 116-E | | 350'/35,000' | | Gulf of Mexico | Preservation stacked(1) |
VALARIS JU-146104 | Jackup | | 2002 | | KFELS MOD V-B | | 400'/30,000' | | UAE | Preservation stacked(1) |
VALARIS 106 | 2011/2018Jackup | | 2005 | | KFELS MOD V-B | | 400'/30,000' | | Indonesia | LT EXL Super 116-EUnder contract |
VALARIS 107 | Jackup | | 2006 | | KFELS MOD V-B | | 400'/30,000' | | Australia | 320'Under contract |
VALARIS 108 | Jackup | | 2007 | | KFELS MOD V-B | | 400'/30,000' | | Saudi Arabia | Preparing for lease contract(4) |
VALARIS 109 | Jackup | | 2008 | | KFELS MOD V-Super B | | 350'/35,000' | | Namibia | Preservation stacked(1) |
VALARIS 110 | Jackup | | 2015 | | KFELS MOD V-B | | 400'/35,000' | | Qatar | Under contract |
VALARIS 111 | Jackup | | 2003 | | KFELS MOD V Enhanced B-Class | | 400'/36,000' | | Croatia | Preservation stacked(1) |
VALARIS 115 | Jackup | | 2013 | | Baker Marine Pacific Class 400 | | 400'/30,000' | | Brunei | Under contract |
VALARIS 116 | Jackup | | 2008 | | LT 240- C | | 375'/35,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-147117 | Jackup | | 2009 | | LT 240- C | | 350'/35,000' | | Mexico | 2012/2019Under contract |
VALARIS 118 | Jackup | | 2012 | | LT 240- C | | 350'/35,000 | | Trinidad | Under contract |
VALARIS 120 | Jackup | | 2013 | | KFELS Super A | | 400'/40,000' | | United Kingdom | Under contract |
VALARIS 121 | Jackup | | 2013 | | KFELS Super A | | 400'/40,000' | | United Kingdom | Under contract |
VALARIS 122 | Jackup | | 2013 | | KFELS Super A | | 400'/40,000' | | United Kingdom | Under contract |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rig Name | Rig Type | | Year Delivered | | Design | | Maximum Water Depth/ Drilling Depth | | Location | Status |
Jackups (Continued) | | | | | | | | | | |
VALARIS 123 | Jackup | | 2019 | | KFELS Super A | | 400'/40,000' | | United Kingdom | Preparing for contract |
VALARIS 140 | Jackup | | 2016 | | LT Super 116-E116E | | 350'340'/30,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-148141 | Jackup | | 2013/20192016 | | LT Super 116-E116E | | 350'340'/30,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-247143 | Jackup | | 2010 | | LT EXL Super 116-E | | 350'/35,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS 144 | Jackup | | 2010 | | LT Super 116-E | | 350'/35,000' | | Gulf of Mexico | Under contract |
VALARIS 145 | Jackup | | 2010 | | LT Super 116-E | | 350'/35,000' | | Gulf of Mexico | Preservation stacked(1) |
VALARIS 146 | Jackup | | 2011 | | LT EXL Super 116-E | | 320'/35,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS 147 | Jackup | | 2013 | | LT Super 116-E | | 350'/30,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS 148 | Jackup | | 2013 | | LT Super 116-E | | 350'/30,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS 247 | Jackup | | 1998 | | LT Super Gorilla | | 400'/35,000' | | United Kingdom | AvailablePreparing for contract |
VALARIS JU-248248 | Jackup | | 2000 | | 2001/2014 | LT Super Gorilla | | 400'/35,000' | | United Kingdom | Under contract |
VALARIS JU-249249 | Jackup | | 2001 | | LT Super Gorilla | | 400'/35,000' | | Trinidad | Under contract |
VALARIS 250 | Jackup | | 2003 | | LT Super Gorilla XL | | 550'/35,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS Viking | Jackup | | 2010 | | KEFLS N Class | | 435'/35,000' | | United Kingdom | Preservation stacked(1) |
VALARIS JU-250Stavanger | Jackup | | 2003 | | LT Super Gorilla XL | | 550'/35,000' | | Saudi Arabia | Leased to ARO drilling |
VALARIS JU-290 | Jackup | | 2011 | | KEFLS N Class | | 435'400'/35,000' | | NorwayUnited Kingdom | UnderPreparing for contract |
VALARIS JU-291Norway | Jackup | | 2011 | | KEFLS N Class | | 400'/35,000' | | Norway | Under contract |
VALARIS JU-292 | Jackup | | 2011 | | KEFLS N Class | | 400'/35,000' | | NorwayUnited Kingdom | Under contract |
(1)Prior to stacking, upfront steps are taken to preserve the rig. This may include a quayside power source to dehumidify key equipment and/or provide electric current to the hull to prevent corrosion. Also, certain equipment may be removed from the rig for storage in a temperature-controlled environment. While stacked, large equipment that remains on the rig is periodically inspected and maintained by Valaris personnel. These steps are designed to reduce time and lower cost to reactivate the rig when market conditions improve.once returned to the active fleet.
(2)The Amended RSA provides that on or before the effective date of the reorganization, the construction contractsRig is being reactivated for these rigs shall be rejected under Section 365 of the Bankruptcy Code, unless otherwise agreed between the shipyard and the Company with the consent of required Consenting Noteholders. If rejected, it is contemplated that we would have to pay an amount equal to the liquidation recovery, which is the amount the contract counterparty would be entitled to receive or retain if the applicable Company entity was liquidated under chapter 7 of the Bankruptcy Code. Prior to December 31, 2020, a Stipulation was filed with the Bankruptcy Court which included an Assumption Term Sheet stating amended terms of these construction agreements.firm contract.
52(3)Rigs are mobilizing from South Korea to Las Palmas, Spain, where they will be stacked.
Following further negotiations, we entered into amended agreements(4)Rigs are under-going contract preparations for lease contracts with the shipyard on February 26, 2021 that become effective upon our emergence from bankruptcy. The amendments provide for, among other things, an option construct whereby the Company has the right, but not the obligation, to take delivery of either or both rigs on or before December 31, 2023. Under the amended agreements, the purchase price for the rigs are estimated to be approximately $119.1 million for the VALARIS DS-13 and $218.3 million for the VALARIS DS-14, assuming a December 31, 2023 delivery date. Delivery can be requested any time prior to December 31, 2023 with a downward purchase price adjustment based on predetermined terms. If the Company elects not to purchase the rigs, the Company has no further obligations to the shipyard. The amended agreements remove any Company guarantee.ARO drilling.
The equipment on our drilling rigs includes engines, draw works, derricks, pumps to circulate drilling fluid, well control systems, drill string and related equipment. The engines power a top-drive mechanism that turns the drill string and drill bit so that the hole is drilled by grinding subsurface materials, which are then returned to the rig by the drilling fluid. The intended water depth, well depth and geological conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling project.
Floater rigs consist of drillships and semisubmersibles. Drillships are purpose-built maritime vessels outfitted with drilling apparatus. Drillships are self-propelled and can be positioned over a drill site through the use of a computer-controlled propellerpropellers or "thruster" dynamic positioning systems. Our drillships are capable of drilling in water depths of up to 12,000 feet and are suitable for deepwater drilling in remote locations because of their superior mobility and large load-carrying capacity. Although drillships are most often used for deepwater drilling and exploratory well drilling, drillships can also be used as a platform to carry out well maintenance or completion work such as casing and tubing installation or subsea tree installations.
Semisubmersibles are drilling rigs with pontoons and columns that are partially submerged at the drilling location to provide added stability during drilling operations. Semisubmersibles are held in a fixed location over the ocean floor either by being anchored to the sea bottom with mooring chains or dynamically positioned by computer-controlled propellers or "thrusters" similar to that used by our drillships. Moored semisubmersibles are most commonly used for drilling in water depths of 4,499 feet or less. However, VALARIS MS-1, which is a moored semisubmersible, is capable of deepwater drilling in water depths greater than 5,000 feet. Dynamically positioned semisubmersibles generally are outfitted for drilling in deeper water depths and are well-suited for deepwater development and exploratory well drilling. Further, we have two hybrid semisubmersibles, VALARIS 8503DPS-3 and VALARIS 8505,DPS-5, which leverage both moored and dynamically positioned configurations. This hybrid design provides multi-faceted drilling solutions to customers with both shallow water and deepwater requirements.
Jackup rigs stand on the ocean floor with their hull and drilling equipment elevated above the water on connected leg supports. Jackups are generally preferred over other rig types in shallow water depths of 400 feet or less, primarily because jackups provide a more stable drilling platform with above water well-control equipment. Our jackups are of the independent leg design where each leg can be fixed into the ocean floor at varying depths and equipped with a cantilever that allows the drilling equipment to extend outward from the hull over fixed platforms enabling safer drilling of both exploratory and development wells. The jackup hull supports the drilling equipment, jacking system, crew quarters, storage and loading facilities, helicopter landing pad and related equipment and supplies.
Over the life of a typical rig, many of the major systems are replaced due to normal wear and tear or technological advancements in drilling equipment. We believe all our rigs are in good condition. As of February 22, 2021, we ownedown all rigs in our fleet. We alsofleet and we manage the drilling operations for two platform rigs owned by a third-party.
We lease various office, warehouse and storage facilities worldwide, including our executivecorporate offices in London, EnglandHouston, Texas and other offices and facilities located in addition to office spacevarious countries in Houston, Aberdeen, Indonesia, Malaysia, Mexico, Brazil, Trinidad, Nigeria, The Netherlands, Saudi Arabia, Thailand,North America, South America, Europe, Africa and Norway.the Asia Pacific region. We own offices and other facilities in Louisiana,United States (Louisiana), Angola Australia, Aberdeen and Brazil.
Item 3. Legal Proceedings
UMB Bank Lawsuit
On March 19, 2020, UMB Bank, National Association (“UMB”), the purported indenture trustee for four series of Valaris notes, filed a lawsuit in Harris County District Court in Houston, Texas. The lawsuit was filed against Valaris plc, two legacy Rowan entities, two legacy Ensco entities and the individual directors of the two legacy Rowan entities. The complaint alleges, among other things, breach of fiduciary duty, aiding and abetting breach of fiduciary duty and fraudulent transfer in connection with certain intercompany transactions occurring after completion of the Rowan merger and the Rowan entities’ guarantee of Valaris’ revolving credit facility. In addition to an unspecified amount of damages, the lawsuit seeks to void and undo all historical transfers of cash or other assets from legacy Rowan entities to Valaris and its other subsidiaries and the internal reorganization transaction. On August 18, 2020, Valaris and certain of its affiliates entered into the Original RSA, including the noteholders that directed UMB to file the lawsuit. Under the Original RSA and the Amended RSA, the lawsuit is stayed by agreement throughout the pendency of the bankruptcy proceeding unless the Original RSA terminates at which point each party reserves its rights to argue whether the case should proceed while in bankruptcy. If the Bankruptcy Court confirms a plan based on the transactions set forth in the Original RSA or the Amended RSA, the lawsuit will be dismissed with prejudice. On August 24, 2020, the parties filed a joint notice staying the case. If the Original RSA terminates and the case in fact proceeds, we are unable to predict the outcome of this matter or estimate the extent to which we may be exposed to any resulting liability. Although we do not expect final disposition of this matter to have a material adverse effect on our financial position, operating results and cash flows, there can be no assurance as to the ultimate outcome of the proceedings.
Shareholder Class Action
On August 20, 2019, plaintiff Xiaoyuan Zhang, a purported Valaris shareholder, filed a class action lawsuit on behalf of Valaris shareholders against Valaris plc and certain of our executive officers, alleging violations of federal securities laws. The complaint cites general statements in press releases and SEC filings and alleges that the defendants made false or misleading statements or failed to disclose material information regarding the performance of our ultra-deepwater segment, among other things.
The complaint asserts claims on behalf of a class of investors who purchased Valaris plc shares between April 11, 2019 and July 31, 2019. The court appointed a lead plaintiff and lead counsel. The case has now been stayed in light of the Valaris plc bankruptcy filing, with the exception that lead plaintiff may continue efforts to serve certain defendants and may file an amended complaint. At this time, we are unable to predict the outcome of these matters or the extent of any resulting liability.
Environmental Matters
We are currently subject to pending notices of assessment relating to spills of drilling fluids, oil, brine, chemicals, grease or fuel from drilling rigs operating offshore Brazil from 2008 to 2017,2019, pursuant to which the governmental authorities have assessed, or are anticipated to assess, fines. We have contested these notices and appealed certain adverse decisions and are awaiting decisions in these cases. Although we do not expect final disposition of these assessments to have a material adverse effect on our financial position, operating results and cash flows, there can be no assurance as to the ultimate outcome of these assessments. A $482,000$0.4 million liability related to these matters was included in accruedAccrued liabilities and other on our consolidated balance sheetConsolidated Balance Sheet as of December 31, 2020.2023 included in "Item 8. Financial Statements."
Other Matters
In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the
outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
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Item 5. | Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Market Information
As a result
On April 30, 2021, pursuant to the plan of reorganization, the Chapter 11 CasesCompany issued an aggregate of approximately 75.0 million Common Shares and in accordance with Section 802.01D of5.6 million Warrants and has listed the Common Shares and the Warrants on the NYSE Listed Company Manual, on August 19, 2020, we were notified by NYSE of its determination to indefinitely suspend trading of the Company’s Class A ordinary shares and to commence proceedings to delist the Company’s Class A ordinary shares from the NYSE. Our Class A ordinary shares were delisted from the NYSE effective September 14, 2020. Since that time, the shares have been quoted on the OTC Pink Open Market under the symbol “VALPQ.” We can provide no assurance that our ordinary shares will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our ordinary shares on this market, whether the trading volume of our ordinary shares will be sufficient to provide for an efficient trading market or whether quotes for our ordinary shares will continue on this market in the future. These recent developments could result in significantly lower trading volumessymbols “VAL” and reduced liquidity for investors seeking to buy or sell shares of our ordinary shares.“VAL WS”, respectively.
Many of our shareholders hold shares electronically, all of which are owned by a nominee of DTC.the Depository Trust Company. We had 20467 shareholders of record on February 1, 2021.2024.
Dividends
The declarationWe have not paid or declared any dividends on our Common Shares. Our Indenture and amount of dividends is at the discretion ofCredit Agreement include provisions that limit our Board of Directors. No dividends have been declared since the first quarter of 2019.ability to pay dividends.
Exchange Controls
There are no U.K. government laws, decrees or regulations that restrict or affect the export or import of capital, including but not limited to, foreign exchange controls on remittance of dividends on our ordinary shares or on the conduct of our operations.
U.K. Taxation
The following paragraphs are intended to be a general guide to current U.K. tax law and what is understood to be HMRC practice applying as of the date of this report (both of which are subject to change at any time, possibly with retrospective effect) in respect of the taxation of capital gains, the taxation of dividends paid by us and stamp duty and SDRT on the transfer of our shares. In addition, the following paragraphs relate only to persons who for U.K. tax purposes are beneficial owners of the shares.
These paragraphs may not relate to certain classes of holders or beneficial owners of shares, such as our employees or directors, persons who are connected with us, persons who could be treated for U.K. tax purposes as holding their shares as carried interest, insurance companies, charities, collective investment schemes, pension schemes, trustees or persons who hold shares other than as an investment, or U.K. resident individuals who are not domiciled in the U.K. or who are subject to split-year treatment.
These paragraphs do not describe all of the circumstances in which shareholders may benefit from an exemption or relief from taxation. It is recommended that all shareholders obtain their own taxation advice. In particular, any shareholders who are non-U.K. resident or domiciled are advised to consider the potential impact of any relevant double tax treaties, including the Convention between the United States of America and the United Kingdom for the Avoidance of Double Taxation with respect to Taxes on Income, to the extent applicable.
U.K. Taxation of Dividends
U.K. WithholdingBermuda Tax - Dividends paid by us will not be subject to any withholding or deduction for, or on account of, U.K. tax, irrespective of the residence or the individual circumstances of the shareholders.
U.K. Income Tax - An individual shareholder who is resident in the U.K. may, depending on his or her individual circumstances, be subject to U.K. income tax on dividends received from us. An individual shareholder who is not resident in the U.K. will not be subject to U.K. income tax on dividends received from us, unless that shareholder carries on (whether alone or in partnership) any trade, profession or vocation through a branch or agency in the U.K. and shares are used by, or held by or for, that branch or agency. In these circumstances, the non-U.K. resident shareholder may, depending on his or her individual circumstances, be subject to U.K. income tax on dividends received from us.
The tax treatment of dividends paid by the Company to individual shareholders is as follows:
•dividends paid by the Company will not carry a tax credit,
•all dividends received by an individual shareholder from the Company (or from other sources) will, except to the extent that they are earned through an Individual Savings Account, self-invested personal pension plan or other regime which exempts the dividends from income tax, form part of the shareholder's total income for income tax purposes,
•a nil rate of income tax will apply to the first £2,000 of taxable dividend income received by an individual shareholder in the tax year 2020/2021 (the "Nil Rate Amount"), regardless of what tax rate would otherwise apply to that dividend income,
•any taxable dividend income received by an individual shareholder in a tax year in excess of the Nil Rate Amount will be taxed at a special rate, as set out below, and
•that tax will be applied to the amount of the dividend income actually received by the individual shareholder (rather than to a grossed-up amount).
Where a shareholder’s taxable dividend income for a tax year exceeds the Nil Rate Amount, the excess amount will, subject to the availability of any income tax personal allowance, be subject to income tax at the following rates for the tax year 2020/2021:
•at the rate of 7.5%, to the extent that the excess amount falls below the threshold for the higher rate of income tax,
•at the rate of 32.5%, to the extent that the excess amount falls above the threshold for the higher rate of income tax but below the threshold for the additional rate of income tax, or
•at the rate of 38.1%, to the extent that the excess amount falls above the threshold for the additional rate of income tax.
In determining whether and, if so, to what extent the relevant dividend income falls above or below the threshold for the higher rate of income tax or, as the case may be, the additional rate of income tax, the shareholder’s total dividend income for the tax year in question (including the part within the Nil Rate Amount) will be treated as the highest part of the shareholder’s total income for income tax purposes.
U.K. Corporation Tax - Unless an exemption is available, as discussed below, a corporate shareholder that is resident in the U.K. will be subject to U.K. corporation tax on dividends received from us. A corporate shareholder that is not resident in the U.K. will not be subject to U.K. corporation tax on dividends received from
us, unless that shareholder carries on a trade in the U.K. through a permanent establishment in the U.K. and the shares are used by, for or held by or for, the permanent establishment. In these circumstances, the non-U.K. resident corporate shareholder may, depending on its individual circumstances (and if no exemption is available), be subject to U.K. corporation tax on dividends received from us.
The main rate of corporation tax payable with respect to dividends received from us in the financial year 2020 is 19%. If dividends paid by us fall within any of the exemptions from U.K. corporation tax set out in Part 9A of the U.K. Corporation Tax Act 2009, the receipt of the dividend by a corporate shareholder generally will be exempt from U.K. corporation tax. Generally, the conditions for one or more of those exemptions from U.K. corporation tax on dividends paid by us should be satisfied, although the conditions that must be satisfied in any particular case will depend on the individual circumstances of the relevant corporate shareholder.
Shareholders that are regarded as small companies should generally be exempt from U.K. corporation tax on dividends received from us, unless the dividends are received as part of a tax advantage scheme. Shareholders that are not regarded as small companies should generally be exempt from U.K. corporation tax on dividends received from us on the basis that the shares should be regarded as non-redeemable ordinary shares. Alternatively, shareholders that are not small companies should also generally be exempt from U.K. corporation tax on dividends received from us if they hold shares representing less than 10% of our issued share capital, would be entitled to less than 10% of the profits available for distribution to our equity-holders and would be entitled on a winding up to less than 10% of our assets available for distribution to such equity-holders. In certain limited circumstances, the exemption from U.K. corporation tax will not apply to such shareholders if a dividend is made as part of a scheme that has a main purpose of falling within the exemption from U.K. corporation tax.
U.K. Taxation of Capital Gains
U.K. Withholding Tax - Capital gains accruing to non-U.K. resident shareholders on the disposal of shares will not be subject to any withholding or deduction for or on account of U.K. tax, irrespective of the residence or the individual circumstances of the relevant shareholder.
U.K. Capital Gains Tax - A disposal of shares by an individual shareholder who is resident in the U.K. may, depending on his or her individual circumstances, give rise to a taxable capital gain or an allowable loss for the purposes of U.K. capital gains tax (“CGT”). An individual shareholder who temporarily ceases to be resident in the U.K. for a period of five years or less and who disposes of his or her shares during that period of temporary non-residence may be liable for CGT on a taxable capital gain accruing on the disposal on his or her return to the U.K. under certain anti-avoidance rules.
An individual shareholder who is not resident in the U.K. will not be subject to CGT on capital gains arising on the disposal of their shares, unless that shareholder carries on a trade, profession or vocation in the U.K. through a branch or agency in the U.K. and the shares were acquired, used in or for the purposes of the branch or agency or used in or for the purposes of the trade, profession or vocation carried on by the shareholder through the branch or agency. In these circumstances, the relevant non-U.K. resident shareholder may, depending on his or her individual circumstances, be subject to CGT on chargeable gains arising from a disposal of his or her shares. The rate of CGT in the tax year 2020/2021 is:
•10%, to the extent that the shareholder's total taxable gains and taxable income in a given year, including any chargeable gains arising from a disposal of his or her shares ("Total Taxable Gains and Income"), are less than or equal to the upper limit of the income tax basic rate band applicable to that shareholder in respect of that tax year (the "Band Limit"), and
•20%, to the extent that the shareholder's Total Taxable Gains and Income are more than the Band Limit.
U.K. Corporation Tax - A disposal of shares by a corporate shareholder resident in the U.K. may give rise to a chargeable gain or an allowable capital loss for the purposes of U.K. corporation tax. A corporate shareholder not resident in the U.K. will not be liable for U.K. corporation tax on chargeable gains accruing on the disposal of its shares, unless that shareholder carries on a trade in the U.K. through a permanent establishment in the U.K. and the shares were acquired, used in or for the purposes of the permanent establishment or used in or for the purposes of the trade carried on by the shareholder through the permanent establishment. In these circumstances, the relevant non-U.K. resident shareholder may, depending on its individual circumstances, be subject to U.K. corporation tax on chargeable gains arising from a disposal of its shares.
The financial year for U.K. corporation tax purposes runs from April 1 to March 31. The main rate of U.K. corporation tax on chargeable gains is 19% in the financial year 2020. Corporate shareholders may be entitled to an indexation allowance in computing the amount of a chargeable gain accruing on a disposal of the shares, which provides relief for the effects of inflation by reference to movements in the U.K. retail price index. Such indexation allowance is calculated only up to and including December 2017. From January 1, 2018, indexation allowance is frozen. Indexation allowance will be calculated for assets acquired before January 1, 2018, irrespective of the date of disposal of the asset.
If the conditions of the substantial shareholding exemption are satisfied in relation to a chargeable gain accruing to a corporate shareholder on a disposal of its shares, the chargeable gain will be exempt from U.K. corporation tax. The conditions of the substantial shareholding exemption that must be satisfied will depend on the individual circumstances of the relevant corporate shareholder. One of the conditions of the substantial shareholding exemption that must be satisfied is that the corporate shareholder must have held a substantial shareholding in the Company throughout a 12-month period beginning not more than six years before the day on which the disposal takes place. Ordinarily, a corporate shareholder will not be regarded as holding a substantial shareholding in us unless it (whether alone, or together with other group companies) holds more than 10% of our ordinary share capital.
U.K. Stamp Duty and SDRT
The discussion below relates to shareholders wherever resident but not to holders such as market makers, brokers, dealers and intermediaries, to whom special rules apply. Special rules also apply in relation to certain stock lending and repurchase transactions.
Transfer of Shares held in book entry form via DTC - A transfer of shares held in book entry (i.e., electronic) form within the facilities of the DTC system will not be subject to U.K. stamp duty or SDRT.
Transfers of Shares out of, or outside of, DTC - Subject to an exemption for certain low value transactions, a transfer of shares from within the DTC system out of that system or any transfer of shares that occurs entirely outside the DTC system generally will be subject to a charge to ad valorem U.K. stamp duty (normally payable by the transferee) at 0.5% of the purchase price of the shares (rounded up to the nearest multiple of £5). SDRT generally will be payable on an unconditional agreement to transfer such shares at 0.5% of the amount or value of the consideration for the transfer. However, such liability for SDRT generally will be cancelled and any SDRT paid will be refunded if the agreement is completed by a duly-stamped transfer within six years of either the date of the agreement or, if the agreement was conditional, the date when the agreement became unconditional.
We have putbeen designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation allows us to engage in place arrangementstransactions in currencies other than the Bermudian dollar, and there are no restrictions on our ability to require that shares held outside the facilitiestransfer funds (other than funds denominated in Bermudian dollars) in and out of DTC cannot be transferred into such facilities (including where shares are re-deposited into DTC by an existing shareholder) until the transferor of the shares has first delivered the shares to a depository we specify, so that stamp duty and/Bermuda or SDRT may be collected in connection with the initial delivery to the depository. Before such transfer can be registered in our books, the transferor will be required to put in the depository funds to settle the resultant liability for stamp duty and/or SDRT, which will be 1.5% of the value of the shares, and to pay the transfer agent such processing fees as may be established from timedividends to time.United States residents who are holders of our Common Shares.
Following decisions ofAt the European Court of Justice and the U.K. First-tier Tax Tribunal, HMRC announced that it would not seek to apply a charge to stamppresent time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or SDRT on the issuanceinheritance tax payable by us or by our shareholders in respect of shares (or, where it is integral to the raising of new capital, the transfer of new shares) into a depositary receipt facility or clearance system provider, such as DTC. Further, in its 2017 Autumn Budget, the U.K. government announced that it would not reintroduce the Stamp Duty and Stamp Duty Reserve Tax 1.5% charge on the issue of shares (and transfers integral to capital raising) into overseas clearance services and depositary receipt systems following the U.K.’s exit from the E.U., and HMRC has since confirmed that this charge will remain disapplied under the terms of the European Union (Withdrawal) Act 2018 following the end of the transition period on 31 December 2020. However, it is possible that the U.K. government may change or enact laws applicable to stamp duty or SDRT, which could have a material effect on the cost of trading in our shares.
The above statements are intended only as a general guide to the current U.K. stamp duty and SDRT position. Transfers to certain categories of persons are not liable to U.K. stamp duty or SDRT and transfers to others may be liable at a higher rate than discussed above.
Equity Compensation Plans
For information on shares issued or to be issued in connection with our equity compensation plans, see "Part III, Item 12.12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters."
Issuer Repurchases of Equity Securities
In 2022, our board of directors authorized a share repurchase program under which we may purchase up to $100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million and in February 2024, they authorized a further increase to $600.0 million. The share repurchase program does not have a fixed expiration, may be modified, suspended or discontinued at any time and is subject to compliance with applicable covenants and restrictions under our financing agreements.
The following table provides a summary of our repurchases of our equity securities during the quarter ended December 31, 2020.2023 (in millions, except average price per share):
| Issuer Repurchases of Equity Securities | Issuer Purchases of Equity Securities | | Issuer Purchases of Equity Securities |
Period | Period | | Total Number of Securities Repurchased(1) | | Average Price Paid per Security | | Total Number of Securities Repurchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Securities that May Yet Be Repurchased Under Plans or Programs | Period | | Total Number of Securities Purchased | | Average Price Paid per Security | | Total Number of Securities Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Securities that May Yet Be Purchased Under Plans or Programs |
| October 1 - October 31 | |
| October 1 - October 31 | |
| October 1 - October 31 | October 1 - October 31 | | 17,313 | | | $ | 0.11 | | | — | | | $ | 500,000,000 | |
November 1 - November 30 | November 1 - November 30 | | 14,685 | | | $ | 0.08 | | | — | | | $ | 500,000,000 | |
December 1 - December 31 | December 1 - December 31 | | 5,549 | | | $ | 0.06 | | | — | | | $ | 500,000,000 | |
Total | Total | | 37,547 | | | $ | 0.09 | | | — | | | |
We are a leading provider of offshore contract drilling services to the international oil and gas industry. We currently own an offshore drilling rig fleet of 61 rigs,industry with drilling operations in almost every major offshore market across fivesix continents. Our rig fleet includes 11 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 45 jackup rigs and a 50% equity interest in ARO, our 50/50 joint venture with Saudi Aramco, which owns an additional seven rigs. We operateown the world's largest offshore drilling rig fleet, amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in ARO, our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well.